Armed Forces Pension Scheme liabilities up £25bn

The pension liabilities of the Armed Forces Pension Scheme (AFPS) have increased by £25.1bn over the past year to £279.1bn, according to the scheme's Annual Report and Accounts 2021-22.

This included an actuarial loss of £19.6bn, made up of a £22.4bn loss due to changes in actuarial assumptions, alongside a £2.8bn gain due to experience items arising on pension liabilities.

The report also showed that there have been “significant changes” in current service costs and net expenditure, with the increase in the current service cost percentage primarily a result of a reduction in the real discount rate.

It acknowledged that other factors such as changes in mortality rates, assumptions for future earnings, and one-off adjustment costs can also impact the percentage rate, although it clarified that these are “not a dominant factor” on a year-to-year basis.

There was also a reduction to the net cash requirement over the past three financial years, mainly due to the increase in the employer contributions rate, from 50.4 per cent of pensionable pay to 65.5 per cent from 2019-20 onwards.

More broadly, the report revealed that net expenditure has fluctuated over the past few years, with 2018-19 bringing “a significant increase” in expenditure due to a £1.9bn provision in respect of the 2015 scheme remedy.

Although 2019-20 saw this provision reduced to £0.92bn, two further provisions totalling £1.04bn were made in respect of the Goodwin legal case and the guaranteed minimum pension, which offset the changes to the 2015 scheme remedy provision.

Work is currently underway on the next actuarial valuation for the scheme, which is due 31 March 2022, with any changes to employer contribution rates as a result of the 2020 valuation expected to take effect from April 2024.

Whilst cost cap valuations were put on hold following the McCloud court ruling, the government has since implemented plans for a McCloud remedy, and confirmed that the cost cap mechanism calculations would be completed allowing for the transitional protection remedy costs.

In line with this, the Government Actuary's Department has since confirmed that AFPS cost cap cost was within the +/-2 per cent corridor specified in the HMT regulations and no changes to benefits or contributions were required.

The cost cap mechanism is also being reformed with effect from the 2020 valuation, with the new mechanism to only allow for the reformed scheme, have an increased cost cap corridor of +/-3% and include an economic check.

Uncertainty persists, however, as the report noted that several unions have filed for a joint judicial review against the government on the inclusion of the McCloud remedy costs within the cost control mechanism.

Whilst the review has been granted permission to be heard, however, the scheme nnoted that there is no further detail yet on the potential timeline for a hearing.

“Even if the judicial review is successful, it is unclear what remedy the court may order, and the government would then need to consider how to proceed following that,” it stated.

“Any attempt to predict such outcomes, such as any impact on scheme liabilities, would be highly speculative at this stage.”

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