Three out of four assessed public service pension schemes breach cost cap

Three out of the four public service pension schemes that have received a cost cap valuation for 2016 breached the cost cap, partly as a result of McCloud remedy costs, with uncertainty as to what the impact will be on future valuations.

Valuation reports produced by the Government Actuary's Department (GAD) revealed that the cost of the Firefighters' Pension Scheme (England) was 14.6 per cent of pay above the employer cost cap.

This was based on a overall 31.4 per cent cost cap of the scheme, 11.6 per cent of which was due to employer contribution corrections, whilst 19.8 per cent stemmed from the McCloud transitional protection remedy cost.

The cost of the Firefighters' Pension Scheme (Wales), meanwhile, was 12.9 per cent above the employer cost cap, including a 17.7 per cent transitional protection remedy cost, and the Police Pension Scheme (England and Wales) was 12.8 per cent of pay above the employer cost cap, including 18.1 per cent for the McCloud remedy.

The cost of the Civil Service Pension Scheme, meanwhile, was 0.4 per cent of pay below the employer cost cap, making it the only public service pension scheme of the four assessed to fall within the +/-2 per cent corridor, reporting a McCloud cost of just 5 per cent.

The government previously paused the cost cap process until there was certainty about the value of pensions to employees from April 2015 onwards in light of the McCloud ruling, later confirming after an industry consultation that McCloud remedy costs would be included in 2016 valuations.

Indeed, the GAD valuation reports also emphasised that the results of this cost cap valuation are not used to set the employer contribution rate due to the Public Services and Judicial Offices Act 2022, with any changes to the employer contribution rates resulting from the 2020 valuations expected to take effect from April 2024.

Despite this, the growing costs could have an impact on future valuations, while the GAD noted that the remedy cost calculations are subject to a number of uncertainties, including in relation to eligibility data, future salary increase, and future retirement ages.

“These calculations are suitable to determine whether there has been a floor breach at the 2016 valuation, but should not be used for other purposes,” it stated.

In addition to this, the GAD warned that, depending on the details of the directions for the 2020 valuations, any difference between the actual cost of remedy as it emerges and the cost anticipated in this valuation may affect future cost control valuations.

The government previously confirmed plans to reform the cost control mechanism, as outlined by the GAD, aiming to implement all three proposed changes in time for the 2020 valuations.

However, the GAD warned that the full impact of the review can only be assessed once the proposals are confirmed, and detailed implementation instructions provided.

A number of unions have also already headed to court over the proposed costs, creating further uncertainty as to the full impact of the McCloud ruling and costs, with the Fire Brigades Union filing further legal claims on this issue earlier this week.

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