There are currently more than 6 million active members of the public service pensions schemes, which cover the NHS, teachers, the armed forces, the police, firefighters, local government workers, the judiciary and civil servants. Valuations of the public service pension schemes are undertaken every four years. The valuations are important as they ensure that the full costs of each scheme are understood and fully recognised by Government, and that there is a fair balance of risk between members and taxpayers with regard to the cost of providing the schemes.
This valuation is the first time that a reformed cost control mechanism will be used. Following a review by the Government Actuary and a public consultation, the cost control mechanism has been reformed to address concerns around its not meeting its original objectives. The objectives are to protect the Exchequer, and by extension taxpayers, from unforeseen costs; to maintain the value of public service pension schemes to members; and to provide stability and certainty on member benefit and contribution levels. The reforms mean that the mechanism now only assesses costs associated with the post-2015 reformed schemes, increases the margin by which costs need to vary from the target in order for benefit, or member contribution, changes to be required from 2% to 3% of pensionable pay, and includes an “economic check” such that changes will only happen if the costs would still be outside the same margin had the impact of changes in long-term economic assumptions been included. The Public Service Pensions Act 2013, when taken together with regulations made under it and the Public Service Pensions and Judicial Offices Act 2022, provides for the introduction of these reforms.
On 31 August 2023, HM Treasury published a document that sets out how the valuations are to be conducted for this valuation cycle. The document sets a range of assumptions that Departments and the Scottish and Welsh Governments must use in finalising their valuations of public service pension schemes. The document allows public service employers, Departments and scheme administrators to complete their valuations and prepare for the implementation of new employer contribution rates and take any necessary steps with respect to cost control mechanism results. The publication of this document follows a statutory consultation with the Government Actuary, which concluded in August 2023. Copies of this document, the 2023 Directions, have been placed in the Houses of Parliament Libraries.
A key factor which influences the valuation results of all unfunded schemes is a reduction in the SCAPE—superannuation contributions adjusted for past experience —discount rate which is used to express schemes’ future pension payments as a present-day cost, based on the Office for Budget Responsibility’s forecast of long-term GDP growth. The updated SCAPE discount rate was announced in March 2023 and is expected to cause increases to employer contribution rates. This is because pension payments paid in the future will be discounted at a lower rate and therefore have a higher value in today’s terms. HM Treasury has committed to provide funding, for all centrally funded employers, for increases in employer contribution rates resulting from the 2020 valuations as a consequence of changes to the SCAPE discount rate.
The outcomes of the valuations are expected to be confirmed later this year via the publication of each scheme’s valuation report. Changes to employer contribution rates will be implemented with effect from 1 April 2024, and any changes to benefits required to bring a scheme back to target cost would apply retrospectively from 1 April 2023. An additional process operates in the local government pension scheme (LGPS) (England and Wales) run by the LGPS England and Wales Scheme Advisory Board.