UK government consults on public service pension reforms

The UK government has launched a consultation on proposed changes to the cost control mechanism in public sector pension schemes, alongside a second consultation on the discount rate methodology used for public service pensions.

As reported by our sister title, Pensions Age, the consultation on the cost control mechanism follows a report from the Government Actuary's Department (Gad), which concluded that the mechanism needs to take into account more of the factors affecting the cost of providing a pension to protect taxpayers.

In light of concerns highlighted, the government is seeking views on three proposed changes to the mechanism, all of which were recommended by Gad's report and aim to help establish a fairer balance of risk between taxpayers and scheme members, and create a more stable mechanism.

One recommendation is moving to a reformed scheme only design, which would remove any allowance for legacy schemes in the cost control mechanism, meaning that the mechanism only considers past and future service in the reformed schemes.

This is expected to ensure consistency between the set of benefits being assessed and the set of benefits potentially being adjusted.

Plans to widen the corridor from 2 per cent to 3 per cent of pensionable pay have also been suggested, with this change expected to help achieve a better balance between stability and responsiveness of the cost control mechanism.

In addition to this, the government has outlined proposals for an economic check, as the mechanism does not currently include changes in long-term economic assumptions and therefore cannot consider the actual cost to the government of providing the pension benefits.

The economic check proposed would ensure that a breach of the mechanism would only be implemented if it would still have occurred had the long-term economic assumptions been considered.

Alongside the proposals for the cost control mechanism, the Treasury has launched a consultation seeking views on the methodology used to set the Scape discount rate, which is used in the valuation of unfunded public service pension schemes to set employer contribution rates.

The current methodology has been in place since 2011, and was introduced following a 2010 consultation, in which the government outlined its intention to review the discount rate every ten years, with today's consultation fulfilling this commitment.

In particular, the consultation seeks views on the on the objectives for the Scape discount rate and the most appropriate methodology for setting the Scape discount rate going forward.

It will explore the advantages and disadvantages of alternative methodologies, including possible modifications that could be made to them, and will consider proposals to align future reviews of the Scape discount rate with the regular cycle of valuations of public service pension schemes.

Following the consultation, the government will undertake a separate exercise to set a new Scape discount rate in line with the chosen methodology.

Both consultations will run for eight weeks, and will close to responses on 19 August.

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