A reduction of the discount rate for calculating employer contributions in unfunded public service pension schemes has been confirmed in today’s (29 October) Budget.
The discount rate has been reduced to 2.4 per cent plus Consumer Price Index, in line with methodology to reflect Office for Budget Responsibility forecasts for long-term GDP growth. The valuations indicate that there will be “additional costs to employers in providing public service pensions over the long-term”.
The government hopes to support public service departments to ensure that the costs do not “jeopardise the delivery of frontline public services” or put “undue pressure” on public employers.
In the consultation paper, it revealed that NHS pension schemes will receive special treatment: “As outlined in the five-year health settlement in England in June 2018, the Treasury has made provision for NHS pension costs until 2023-24.” This will be adjusted in line with the confirmed Superannuation Contributions Adjusted for Past Experience rate change.
The consultation paper also revealed that the Department for Education is proposing to provide more funding to “cover pension costs for the rest of this spending review period” for state schools.
The technical change to the discount rate could increase transfers from public sector employers to Treasury by up to £6bn a year from April 2019, according to the union, Prospect. The Treasury has committed to returning most of those transfers in 2019/20 but has made no commitment in relation to £4.75bn a year of transfers from 2020/21 onwards.
The announcement of the discount rate reduction does not come as a surprise, as the plan was released in a statement by Chief Secretary to the Treasury, Liz Truss, on 6 September 2018.
This has led to some controversy over the past few months. Earlier this month, National Police Chief Counsel chair, Sara Thornton expressed concern that the impact of the reduced discount rate could result in nearly 10,000 fewer police officers.
Furthermore, it is expected that teachers’ employers will have to contribute an extra £150m into the Teachers’ Pension Scheme once the discount rate is reduced, or cover the costs by “reducing the number of staff”, the Universities and Colleges Employers Association warned.