Forces are facing significant increases in employer pension payments
From: Steve Edwards <firstname.lastname@example.org> Sent: 16 November 2018 13:06 Subject: PENSION SCHEME - COST CAP BREACH
I just thought it may be useful if you had the simplest answer I can give to the Police Pension Scheme cost cap floor breach referred to at yesterday’s NEC meeting in case you get any queries.
As you know I represent NARPO on the Scheme Advisory Board and under the Regulations the matter has been referred to the SAB as part of the consultation process, it is important to note that this applies to all public sector schemes:
Conducting actuarial valuations forms a key part of assessing the cost of public service pension schemes and their long-term affordability to the taxpayer. It is an important and long-standing principle that the full costs of the schemes are recognised and met as pension liabilities are incurred.
For the first time, the valuations measure whether a sub-set of scheme costs (‘cost cap costs’) have moved by 2% of pay or more in either direction. If costs breach the 2% floor or ceiling, then the cost cap mechanism requires adjustments to member pensions to return costs to the target level. The cap was introduced following Lord Hutton’s recommendation for an employer cost ceiling to provide backstop protection to the taxpayer. In discussions with employee representatives at the time, the government accepted that the cost cap would include a floor as well as a ceiling, effectively establishing the 2012 valuation as a benchmark for public service pension costs.
The 2016 Valuation of the Police Pension Schemes (England & Wales) was carried out and the provisional valuation results as at 31 March 2016 for the Police Pension Scheme in England & Wales showed a cost cap floor breach of 5.3%. The results indicate that, as defined under the proposed cost cap framework, the estimated employer cost cap cost of the scheme 7.5% has decreased to a level which requires steps to be taken to restore the employer cost of the scheme to the scheme’s target cost 12.8%.
Regulation 198 of The Police Pension Regulations 2015 (SI 2015/445) [see below]provides for a process whereby the responsible authority and the SAB seek to reach agreement on the necessary steps to be taken to restore the cost to the scheme’s target cost:
Employer cost cap
198.—(1) The employer cost cap for this scheme is 12.8% of pensionable earnings of members of this scheme.
(2) In the circumstances specified in paragraph (4), the Secretary of State must consult such persons (or those appearing to the Secretary of State to represent such persons) as appear to the Secretary of State likely to be affected by any steps that will be taken, with a view to reaching agreement on the steps required to achieve the target cost for this scheme.
(3) If, following such consultation, agreement is not reached the fraction of the member’s pensionable earnings specified in regulation 58 (amount of pension for a scheme year) as the amount of standard earned pension for a scheme year must be adjusted for pensionable earnings after the date of the adjustment, so that the target cost for this scheme is achieved.
(4) The circumstances are that the cost of this scheme goes beyond the margin either side of the employer cost cap for this scheme specified in regulations under section 12(5)(a) of the Act.
(5) In this regulation—
“cost of this scheme” means the cost of this scheme calculated following a valuation in accordance with regulation 197; and
“target cost for this scheme” means the target cost for this scheme specified in regulations under section 12(5)(b) of the Act.
The matter has been referred to the SAB under the above Regulation with the following remit:
2. The SAB is invited to advise the responsible authority on which solution it considers should be adopted to enable the cost cap breach to be rectified. In presenting such advice, the SAB is asked to indicate what considerations it has taken into account.
3. The SAB is requested to provide its advice to the responsible authority no later than 07/12/2018. If the SAB is unable to agree a consensus position when formulating its advice, it is asked to advise the responsible authority of that fact and provide details of the proposals under consideration or proposed by any identifiable subgroup or member within SAB no later than 07/12/2018.
4. In the event that a consensus position cannot be reached after the consultation, with a view to reaching agreement, is concluded, the default position of an increase to the accrual rate will be applied.
If the Home Office and the SAB are unable to reach agreement on the steps required to correct the cost cap breach, regulation 198 states that the member’s accrual rate must be adjusted so that the scheme’s target cost is met. In this case, we expect the accrual rate for service after 31 March 2019 to improve from 1/55.3 to 1/47.0 which is where the extra cost for Forces derives from.
The SAB as you can see have until the 7th December to come up with some viable alternatives for the Home Office to consider and are currently considering other options which would not result in the default position under the Regulations being imposed.