Download DCLG (11) 75 Presentation, HM Treasury

Public Service Pensions Reform
James Richardson, HM Treasury
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Cost ceilings and the employer
contribution cap
1. Cost ceilings
• Government has set out its proposals
• Allows scheme specific discussions to progress, within specified cost limits
• Cost of scheme specific proposals cannot exceed cost ceilings, set by
reference scheme
• Cost ceilings will be used during scheme specific negotiations, but will not
play any ongoing role
2. Employer contribution cap
• This will be discussed in due course
• It ensures public service pensions remain affordable and sustainable, in
case costs within the new schemes increase
• Fixed cap to taxpayers’ contributions to schemes as a proportion of
pensionable pay.
• Timing: To operate following the introduction of new schemes
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Creation of a reference scheme
• Reference scheme has been set by Treasury, based on the
recommendations of Lord Hutton’s Independent Public
Service Pensions Commission.
• We have received advice from the Government Actuary’s
Department on data assumptions and methodology.
• Reference scheme does not set the parameters within which
scheme discussions should take place. It exists purely in order
to determine the cost ceilings.
• Without prejudice to the Government’s final decisions on
scheme design.
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Reference scheme design
The features of the reference scheme are consistent with those recommended by the Independent
Public Service Pensions Commission:
• Career Average Revalued Earnings scheme (CARE) and earnings revaluation of past CARE service
for active members
• Accrual rate to be determined centrally
• Normal pension age linked to state pension age (or to age 60 for active members of the
firefighters’ scheme).
• Pensions in payment and in deferment indexed by CPI
• Average member contributions assumed to be 3.2 percentage points above current level
• No fixed lump sums
• Optional commutation, with a 12:1 factor for converting pension to lump sum (ie. for every £1
pension given up, member receives £12 as lump sum)
• Ancillary benefits (such as sickness, death and survivors’ benefits) match provision in schemes
that are currently open to new members
• Members rejoining after a period of deferment less than 5 years can link new service with
previous service
• Members transferring between public service schemes would be treated as having continuous
active service.
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Data methodology
• Membership data: We will be using member data from
the most recent actuarial valuation, unless more up to
date and robust membership data are available.
Calculations will have an effective date of 1 April 2015.
• Methodology: Projected Unit Method (PUM). Standard
actuarial methodology with one year control period.
PUM measures the cost of accrual and avoids emphasis
on any one category of membership. It is used in
preparing the resource accounts of public service
pension schemes.
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Assumptions
The following consistent assumptions will apply across schemes:
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Nominal discount rate – 5% pa
Earnings increases – 4.25% pa
CPI increases – 2% pa
Improvements in post retirement life expectancy – ONS 2008
population projections
• Proportion of pension commuted in exchange for a lump sum – 75%
of HMRC limit
• Age above Normal Pension Age - Scheme actuaries will be asked to
propose assumptions for ages and career paths above the Normal
Pension Age in the existing schemes.
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Accrual rates
• Recognise the importance of accrual rates in
these discussions.
• Government has asked scheme actuaries to
prepare a full range of accrual rates, from
1/50ths to 1/80ths, to inform its decisions.
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Transition and past service costs
Past service costs
• If proposals under discussion relate to past service (prior to 2015)
incur costs, then these costs must be included within the cost
ceilings.
• Net Present Value of past service cost increases should be spread
over 5 year period. This is so they can be added to the costs of
future accrual and expressed as a % of pensionable pay.
Transition costs
• Scheme specific costs could include transitional arrangements,
which could increase the cost of future accrual above the level of
the cost ceilings in the short term.
• Where transitional arrangements are provided, the cost ceiling
should be compared against the average cost of future accrual over
a 5 year period.
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What’s happening next?
• 22nd September – Further meeting with TUC.
• By end September – Government will announce its
decision on cost ceilings for pensions schemes. We
have asked GAD to prepare calculations on a full range
of accrual rates – from 1/50ths to 1/80ths.
• End October – Government receives initial proposals
from unions for reformed schemes.
• November/December – Further meeting between
Government and TUC.
• End December – Final proposals for reformed
schemes.
UNCLASSIFIED