Public Service Pensions

Thursday 13th March 2014 Written Statements

[The Chief Secretary to the Treasury (Danny Alexander)]

The UK faces a substantial long-term challenge to ensure the public finances remain sustainable and the Government have therefore taken much needed action to address the pressures from an ageing population. This includes a package of reforms to public service pensions including a move to “career average” schemes, and changes to the normal pension age for public service workers. Reforms to public service pension schemes are forecast to save £430 billion by 2061-62, while also ensuring that the pensions offered to public service workers remain among the very best available.

The next stage in this programme of reform is to ensure that the costs of the public service schemes are properly measured and remain sustainable in the long term. To achieve this, the Treasury has this week made directions and laid regulations on valuations of public service pension schemes and the employer cost cap, in accordance with the provisions of the Public Service Pensions Act 2013.

These directions formalise the basis of the full actuarial valuations of the schemes that are currently being carried out to measure scheme costs. This is the first time valuations have been carried out for a number of years and the first time that schemes have been valued simultaneously and according to the same rigorous, principled and transparent approach.

The final results for the NHS, teachers and civil service schemes will be published later in the spring. But it is already clear that these will show the level of contributions paid by employers have not been sufficient to meet the full long-term costs of these schemes. If current rates were allowed to continue the shortfall would be nearly £1 billion a year across the teachers, civil service and NHS schemes.

The Government are therefore taking corrective action, and will introduce new higher employer contribution rates for these schemes from 2015. This will ensure that the contributions paid by public service employers reflect the full costs of the schemes, including the costs of the deficits that have arisen since previous valuations.

This will not have any impact on existing pensioners, on member benefits, or on the contributions paid by employees in those schemes. Instead it will ensure that pension costs are properly met by employers and do not fall as an additional cost to the taxpayer.

Actuarial reports published by these three schemes and the police pension scheme (E&W) will confirm the final contribution rates to be paid by each scheme. The remaining public service schemes are expected to complete their valuations later in the year.

Alongside this action to ensure that pension costs are properly accounted for in the short term, the Government are also determined to ensure that costs are controlled in the long term, and that there is a fair balance of risks between scheme members and the taxpayer. Accordingly, as required by the Public Service Pensions Act 2013, the Government will establish employer cost caps in the new public service pension schemes. This will provide backstop protection for the taxpayer, and ensure that the risks associated with pension provision are shared with scheme members. The Treasury directions and regulations provide the framework for the operation of the cost-cap mechanism.

The Treasury has published additional documentation on the valuations and the operation of the employer cost cap to provide additional guidance on the Government’s policy. It has also published the outcomes of consultation with the Government actuary. These are available at: https://www.gov.uk/government/publications/public-service-pensions-actuarial-valuations-and-the-employer-cost-cap-mechanism and I will arrange for copies to be placed in the Libraries of both Houses.

I am also today publishing directions which set out the requirements for the provision of benefit information statements in the new public service pension schemes. Under the Public Service Pensions Act all new schemes will be required to issue annual benefit statements to members setting out the pension rights they have accrued. The attached directions set the requirements for these statements. These short directions largely mirror requirements set by DWP for wider pension schemes.