Govt presses ahead with cost control mechanism changes

The government has confirmed that it will be implementing all three proposed reforms to the cost control mechanism and discount rate methodology of public service pension schemes.

The Public Service Pensions and Judicial Offices Bill will be amended and secondary legislation introduced to include changing the cost control mechanism to adopt a reformed scheme only design, widening the cost corridor from +/-2 per cent to +/- 3 per cent of pensionable pay, and the introduction of an economic check linked to expected long-term GDP.

In its consultation response, the government said it was aiming to implement all three proposals in time for 2020 valuations.

"It is necessary to implement the reformed scheme only design and the economic check through expanded powers in primary legislation, when parliamentary time allows, and then by making Treasury Directions under those powers in due course," it stated.

"The wider cost corridor will be implemented to a longer timeline via secondary legislation."

Commenting on the consultation response, Hymans Robertson head of LGPS valuation, Robert Bilton, said he disagreed with the government's decision to use expected long-term GDP growth for cost control in the Local Government Pension Scheme (LGPS), stating that it should use a discount rate reflecting the expected return from the overall asset allocation of LGPS funds.

Bilton explained: “While we understand the government’s desire for consistency and commonality with the unfunded schemes, this decision significantly weakens alignment of the cost control mechanism in the LGPS with actual employer costs, and could lead to further contrary outcomes where the cost control result is contradictory to the direction of employer contribution rates.

“We think it would have been preferable that the LGPS cost control mechanism uses a discount rate which reflects the expected return from the overall asset allocation of LGPS funds.

“The government has set out some areas for further work, including the opportunity for the Scottish LGPS SAB to implement their own cost control mechanism, as the English and Welsh LGPS SAB does, and further engagement with the LGPS on managing the employer costs which arise from excluding the legacy schemes from the cost control mechanism.”

However, Bilton welcomed the government's decision to make changes, arguing that this will bring increased stability to future cost cap valuation results.

"In particular, the ‘economic check’ will help to reduce the potential for ‘perverse’ results to occur," he said.

“The check should make it less likely that we will see a recurrence of the situation from the 2016 actuarial valuations, where benefit improvements are proposed at the same time as contribution rate increases."

Despite this, Bilton said that it is "disappointing" that the government has not opted to introduce a qualitative review of the raw results, clarifying that whilst government’s concern about a loss in transparency is understandable, this review would have "further improved the mechanism by providing a ‘common sense’ check on what is still a very formulaic process".

The Association of Consulting Actuaries (ACA) has also previously urged HMT to consider a new way of flexing the rate of public service pension increases to reflect economic growth, outlining a "fairer way" of dealing with the issue.

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