Public service pension scheme cost cap branded a ‘car crash’ following breach

The employer cost cap for public service pension schemes has been described as a “car crash”, after it emerged that some pension funds could have potentially breached the limits.

Speaking at the Pensions and Lifetime Savings Association (PLSA) Local Authority conference today, 6 November, Local Government Association head of pensions, Jeff Houston, said that measures which have led to breach have been “counter-intuitive” and will lead to rising costs for schemes.

In September, the government hinted that the cost cap had been breached in a letter to the Trade Union Congress, meaning that some defined benefit schemes could see their benefits change in April 2019.

The cost cap, implemented in 2015, is a control mechanism that protects taxpayers and employers from changes to their pension costs. However, if it emerges that the cost cap has been breached, an adjustment to the employer contribution rate will be made to return to the level of the cap.

Houston said: “There is some logic behind this, although what we have ended up with … I would say car crash. We have ended up with a counter-intuitive car crash – of potentially employer rates going up, but also benefits going up.”

He added that the Local Government Association has been in discussion with the Treasury on how it can implement measures on bringing the cost of the scheme down, as well as looking at changes to employee contributions.

Northern Ireland Local Government Officers Superannuation Committee (NILGOSC) chief executive and secretary, David Murphy, added: “Will the cost cap keep the scheme affordable? The answer is of course a big fat no. Public sector schemes have breached the floor of the cost cap, not the ceiling.”

In the letter the TUC on 6 September, Chief Secretary to the Treasury, Liz Truss, wrote: “Early indications are that there may be cost cap floor breaches in at least some of the schemes.

“The scheme valuation reports from government’s actuary department (GAD), expected later this year once the directions are finalised, will confirm whether there is a breach; and will trigger the process set out in section 12 of the Public Service Pensions Act 2013, as well as Treasury and scheme regulations.”

Also speaking at the conference, GAD deputy chief actuary, Michael Scanlon, added that any changes to schemes could mean some schemes will face a double hit following the further reduction to the discount rate, which was confirmed in the Budget last week.

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