Skip to main content

Public Service Pensions: Cost Control Mechanism and Discount Rate Methodology

Volume 697: debated on Thursday 24 June 2021

The Government have today published two consultations relating to public service pensions. These consultations seek views on two important aspects of the framework governing public service pension schemes: proposed reforms to the cost control mechanism and the methodology used to set the discount rate used at valuations of unfunded public service pension schemes.

One of the proposed reforms to the cost control mechanism could mean that the discount rate used at valuations of unfunded public service schemes to set employer contribution rates may also become relevant to the outcome of the cost control mechanism in the future. These consultations are therefore being published in parallel to ensure that respondents are fully informed of any potential interactions and to allow them to consider their responses across both areas of the public service pension framework.

The cost control mechanism

The first consultation document published today is titled “Public Service Pensions: Proposal to Reform the Cost Control Mechanism”.

Following recommendations from the Independent Public Service Pensions Commission in 2011, the cost control mechanism was introduced into the valuation process for public service pension schemes in the Public Service Pensions Act 2013 following consultation with member representatives. It was designed to ensure a fair balance of risk regarding the cost of providing defined benefit (DB) public service pensions between members and the taxpayer.

In September 2018, the Government announced they would ask the Government Actuary to conduct a review of the mechanism amidst concerns that it was not operating in line with its original objectives, which are:

To protect taxpayers from unforeseen costs

To maintain the value of pension schemes to the members

To provide stability and certainty to benefit levels—the mechanism should only be triggered by “extraordinary, unpredictable events”.

The Government Actuary’s final report, which sets out his findings and recommendations, was published on 15 June. The Government have considered this report and are now consulting on reforms they propose to make to the mechanism to ensure it operates as intended. All of the Government’s proposed changes are recommendations by the Government Actuary.

The consultation will last for eight weeks and close on 19 August. The consultation document can be found at: https://www.gov.uk/government/consultations/public-'>https://www.gov.uk/government/consultations/public- service-pensions-cost-control-mechanism-consultation.

The discount rate methodology

The second consultation is titled “Public Service Pensions: Consultation on the discount rate methodology”.

“SCAPE” (superannuation contributions adjusted for past experience) is the name of the process for setting employer contribution rates at valuations of unfunded public service pension schemes. The “SCAPE discount rate” is the discount rate used as part of this process. It is used to express the pension promises being built up in a scheme as a present-day cost and is set by HM Treasury following a prescribed methodology.

The Government previously consulted on the methodology used to set the SCAPE discount rate in 2010. In response to that consultation, they announced that the SCAPE discount rate methodology would be based on expected long-term GDP growth.

In response to the 2010 consultation, the Government expressed an intention to review the SCAPE discount rate methodology every 10 years. This consultation meets that intention and seeks views on the most appropriate methodology for setting the SCAPE discount rate going forward.

The consultation will last for eight weeks and close on 19 August. The consultation document can be found at: https://www.gov.uk/government/consultations/public-'>https://www.gov.uk/government/consultations/public- service-pensions-consultation-on-the-discount-rate-methodology.

[HCWS117]