Consultation outcome

Changes to the Scheme Advisory Board cost management process: government response

Updated 11 May 2023

Government response to the consultation

Background

1. In 2010 the government set up the Independent Public Service Pensions Commission (IPSPC), chaired by former Work and Pensions Secretary of State, Lord Hutton of Furness. Its remit was to conduct a fundamental structural review of public service pension provision. In the final report (2011), the Commission stated its aim was to recommend a structure that would include sharing the risks and costs of public service pensions fairly between employees and government.

2. The government accepted the IPSPC’s recommendations and cost management processes were legislated for by HM Treasury for all public service schemes under section 12 of the Public Service Pensions Act 2013.

3. All main public service pension schemes are subject to 4-yearly valuations by the Government Actuary’s Department (GAD) at which the value of pension benefits today that will be paid in the future are assessed. In the unfunded schemes, the scheme valuations are used to set the employer contribution rate but in the Local Government Pension Scheme (“LGPS”), with employer contributions set locally at the level of the 86 individual administering authorities, the main relevance of the scheme valuation is to assess costs for the purposes of the Cost Control Mechanism (CCM) required under section 12, as above. At the time of introduction, it was agreed that the LGPS (England and Wales) Scheme Advisory Board (“SAB”) would operate an additional check on scheme costs and the way they are shared between employers and employees. The SAB Cost Management Process (CMP) is provided for in regulation 116 of the LGPS Regulations 2013. The SAB CMP operates prior to the HM Treasury CCM, and recommendations made as a result (and accepted by government) are considered when calculating the scheme costs (for the purpose of the HM Treasury CCM).

4. The first assessment of scheme costs under the main HM Treasury CCM was undertaken as of 31 March 2016. Provisional 2016 cost control results indicated a breach of the cost cap floor for all schemes for which results were assessed.

5. In the context of these provisional results government announced that it was asking the Government Actuary to review the CCM for future exercises. The key drivers of the indicative floor breaches were a reduction in the assumed level of future pay increases and a reduction in assumed life expectancy. Neither of these reasons necessarily seemed to fit the category of ‘extraordinary, unpredictable events’, which it was originally intended would be the trigger for benefit rectification under cost control. This therefore raised the question of whether the CCM as designed was too volatile.

6. The operation of the HM Treasury 2016 CCM was paused at the end of January 2019 due to uncertainty about scheme costs following the Court of Appeal judgment in McCloud v Lord Chancellor (PDF, 699 KB). This held that the “transitional protection” offered to some members as part of the 2013 Act reforms amounted to unlawful discrimination.

7. In July 2020 the government lifted the pause (PDF, 139 KB), as progress in determining the increase in value of member benefits as a result of the McCloud remedy meant costs were now more certain. It was decided that the cost of the remedy would count as a “member cost” in the completion of the 2016 valuations.

8. In October 2021, the government published amending directions for completion of the 2016 valuations (PDF, 209 KB). A letter from the Government Actuary confirmed that the amending directions reflected government’s policy intention that the impact of the McCloud remedy should be considered in the 2016 valuations.

9. Following the Government Actuary’s review of the HM Treasury CCM a consultation was launched in June 2021 on 3 proposals:

• a redesign of the CCM – to ensure it only considers past and future service benefits built up in the reformed schemes with all legacy scheme costs excluded,
• widening the corridor from 2% to 3% of pensionable pay, thereby reducing the regularity of breaches, and
• introducing an economic check, so that a breach of the mechanism would only be implemented if it would still have occurred had the impact of any change in long-term economic assumptions been considered.

The government published a response to the consultation in October 2021 which confirmed its approach and that the 3 changes above would be taken forward. Government legislation was laid in Parliament in July 2022 to widen the cost corridor so that costs can vary more from target before action is taken.

10. Following the changes announced to the HM Treasury CCM, the SAB considered the changes it wished to make to the operation of the SAB CMP to ensure the processes remained generally aligned. A final policy paper (PDF, 171 KB) was considered by a SAB committee in February 2022 and approved by the Board in March 2022 following which recommendations were made to government.

11. A consultation from January to March 2023 outlined changes to the regulations governing cost control in the LGPS which the government considered desirable or necessary following the SAB review and policy paper. Government remained of the view that there should be flexibility in how the HM Treasury CCM, and the SAB CMP interacted and proposed changes to the regulations which did not have the potential for undesirable limitations on flexibility.

Introduction

12. On 30 January 2023, the Department of Levelling Up, Housing and Communities opened a consultation on proposed amendments to the Local Government Pension Scheme (LGPS) Regulations 2013 (‘the 2013 Regulations’). The consultation period closed on 24 March 2023.

13. The consultation proposed amendments to the 2013 Regulations SAB cost management process in regulation 116 of the LGPS Regulations 2013. The government remained of the view that there should be flexibility in how the HM Treasury CCM, and the SAB CMP interact, so did not propose changes to the regulations which limited flexibility in a way considered undesirable. The SAB process operates symmetrically, so that if valuations show that the costs of providing benefits have risen or fallen outside of a target range, recommendations must be made which would bring costs back toward the target. The amendments are areas where clarification has been sought, or a change of approach has been deemed necessary.

The SAB CMP operates prior to the HM Treasury CCM, and recommendations made as a result (and accepted by government) are considered when calculating the scheme costs (for the purpose of the HM Treasury CCM).

14. This document summarises the responses received and sets out how the government plans to take forward each of the matters covered in the consultation.

Overview of the responses received

15. This was a technical consultation and there were only 2 responses, one from the Scheme Advisory Board and the other from a professional firm of actuaries.

Correcting the regulation cost control dates to align with other public sector scheme valuation dates

16. The 2013 Regulation 114(3) currently requires the actuarial valuation for the HM Treasury cost control mechanism takes place in line with the actuarial valuation of pension funds. These are the local fund valuations which take place every 3 years. It is proposed to update this in line with HM Treasury directions (specifically The Public Service Pensions (Valuations and Employer Cost Cap) (Amendment) Directions 2018 which moved the HM Treasury cost control mechanism onto a 4-year cycle for the LGPS.

The 2013 Regulation 116(1) also requires that the SAB cost control process takes place in line with the 3 yearly actuarial valuation of pension funds, and it is proposed to update this to 4 years for consistency with the HM Treasury cost control mechanism.

Amending the regulations to bring the scheme valuation and cost control process in line with the scheme valuations in the other public service pension schemes every 4 years will align the government and SAB mechanisms.

Response overview

2 (100%) consultees responded on this proposal; both supported the change.

Government response

This amendment has been included in the 2013 LGPS Regulations.

Removing the requirement for SAB recommendations to bring the scheme back to target cost

17. Regulation 116 currently requires the SAB to make recommendations to bring the cost of the scheme back to the target cost. We proposed additional flexibility by amending the regulations so that if the Board decide to make recommendations, they do not need to recommend that costs move back to target. Regulation 116 also requires that if the overall cost of the Scheme is more than 2% from the target cost in either direction, the SAB must make recommendations to bring the scheme back to target. As this is inconsistent with the more flexible approach, we proposed removing it in its entirety.

The additional flexibility can act to address cost changes in the LGPS as they arise. The proposal was that recommendations may be made to move towards, or to target cost but not beyond target cost.

However, it should be noted that if following the implementation of recommendations made by the SAB following the CMP process, there is still a breach under the HM Treasury CCM, then action will be taken by the government to bring costs back to target.

Response overview

2 (100%) consultees responded on this proposal; both supported the change.

Government response

This amendment has been included in the 2013 LGPS Regulations.

Economic check in the LGPS

18. Regulation 115(2) provides that the government must take steps to bring the Scheme back to the target cost where there has been a breach of the corridor under the HM Treasury cost control mechanism. An economic check is being introduced via Treasury’s valuation directions allowing that a breach of the mechanism will only be deemed to have occurred if it would still have occurred had the impact of any change in long-term economic assumptions been considered. At the time of consultation, we awaited publication of the draft valuation directions. We proposed consulting the SAB when the directions were publicly available to ensure that any necessary changes to regulation 115(2) were technically accurate before being implemented.

Response overview

2 (100%) consultees agreed that our proposals on the economic check seemed reasonable

Government response

HM Treasury’s draft valuation directions will be available for consultation with public sector pension schemes Scheme Advisory Boards shortly. We will consult the LGPS SAB when the draft directions are publicly available to ensure that any necessary changes to regulation 115(2) are technically accurate before being implemented.

Public sector equality duty

19. Prior to the consultation government made an initial assessment under the duty and did not believe there to be any equality impacts on protected groups from the proposals as there would be no change to member benefits arising from these procedural adjustments.

Response overview

2 (100%) consultees responded on equality impacts on any of the protected groups. Neither identified any equalities impacts from the proposals.

Government response

Government does not consider that the changes made in the regulations will result in differential impact to individuals with protected characteristics.