Public sector pension costs to rise further after discount rate reduction

A further reduction to the discount rate used for valuing benefits and setting employer contribution rates will “increase public sector pension costs”, Aon has said.

Commenting on the Chancellor Philip Hammond’s Budget announcement on Monday, 29 October, Aon principal consultant, Madalena Cain, said it will effect some public sector contractors “immediately”, despite government assurances of “additional funding for a transitionary period”.

The discount rate will be reduced to 2.4 per cent plus Consumer Price Index (CPI) from 2.8 per cent plus CPI, which will lead to “significant cost increases for all employers”.

Cain said: “This [the discount rate] will be factored into the current valuation cycle for the unfunded public service pension schemes, such as the Civil Service Pension Scheme, the National Health Service Pension Scheme, and the Teacher's Pension Scheme.”

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.

“Increases to this extent - if not factored into their original pricing for the contract - could adversely impact the delivery of those services. It could also lead to more cautious pricing by contractors in the future, meaning that the public sector picks up higher than expected risk adjusted costs.

“Ironically, changes to the discount rate are excluded from the cost cap analysis for benefits, so we are seeing both at once. These benefit improvements, if implemented, could potentially lead to further employer cost increases, leading to a double whammy for contractors,” Cain added.

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