Consultation outcome

Update on the 2016 and 2020 Valuations

Updated 19 July 2021

Update on the Completion of the Cost Control Element of the 2016 Valuations and changes to employer contribution rates following the 2020 Valuations

1. Summary

The government has announced that:

• the cost control element of the 2016 valuations will now be completed, using the ‘Deferred Choice Underpin’ to establish the way in which ‘McCloud remedy’ will be taken into account for relevant schemes
• there will not be reductions to member benefits as a result of completing the 2016 valuations. Therefore, the impact of any ceiling breaches that occur will be waived while any floor breaches will still be honoured, with effect from 1 April 2019
• changes to the employer contribution rates for most unfunded public service pension schemes following the 2020 valuations will not take effect until 2024

2. Background

On 16 July 2020, the government published consultations on its proposals to address the discrimination identified in court rulings following the McCloud and Sargeant litigation. Alongside this, HM Treasury also provided an update on the cost control element of the 2016 valuations process^{[footnote 1]}. In this update, HM Treasury set out that the cost control mechanism, which had been paused as a result of uncertainty caused by the litigation, would be restarted. The update also made clear that the costs associated with the increased value of schemes to members as a result of ‘McCloud remedy’ (whereby members in scope will be given a choice of benefits in respect of any accruals from 1 April 2015 to 31 March 2022) will be taken into account in the completion of the process, as these are ‘member costs’.

HM Treasury committed to setting out the detail of how the pause will be lifted and the cost control process completed in amending directions.

Additionally, in 2018, the then Chief Secretary to the Treasury (CST) announced a review of the cost control mechanism by the Government Actuary (GA) to examine whether it was operating appropriately and in line with the original policy intentions.^{[footnote 2]} On 16 July 2020, the CST announced in a Written Ministerial Statement that this review - which had been put on hold whilst the mechanism was paused - would now proceed.^{[footnote 3]} The GA’s review is now underway and will report to government in April 2021. There remains ongoing concern about the operation of the cost control mechanism and whilst the findings of the review will not impact the completion of the 2016 valuations process, the aim is to make any changes that the government decides are necessary before the next (2020) valuations are completed.

3. Update on the 2016 valuations

The government has been working to develop the amending directions to complete the 2016 valuations. However, they could not be finalised until the way in which McCloud remedy will be implemented was decided. Whether members would be provided an ‘Immediate Choice’ or a ‘Deferred Choice Underpin’ was one of the main questions addressed in the public consultation.^{[footnote 4]}

Now that the government has set out its response to the consultation and a Deferred Choice Underpin will be the method by which the McCloud remedy is delivered in relevant schemes, HM Treasury is able to produce the amending directions.

Before finalising them, HM Treasury will share the amending directions with schemes so that, in consultation with Scheme Advisory Boards (SABs), they can make any updates to the 2016 valuation assumptions that are required. Following engagement with SABs, final versions of the directions will be published, and schemes will then finalise results for the 2016 cost control valuations. Where necessary, schemes will then commence discussions with SABs later this year on any rectification.

4. Taking forward the results

While the impact of the court judgments remained uncertain, it was not possible to assess the value of the public service pensions arrangements with any certainty, which led to the pause of the cost control mechanism. As set out above, it has been necessary to undertake further work to ensure that the directions and approach accurately reflect the value of schemes to members. Whilst work has been progressing as quickly as possible, the government is aware that there has been ongoing uncertainty for members.

Before the impact of the McCloud and Sargeant litigation was clear, provisional 2016 cost control results indicated floor breaches in most schemes. In July 2020, the government explained that taking the McCloud remedy into account would mean that results from the cost control process would show higher costs than would otherwise have been the case. The government therefore said it would consider how to take forward results for each scheme once the detail of these was known.

Whilst the directions are yet to be finalised, and will be published as soon as possible, early estimates indicate that some ceiling breaches are likely. If normal statutory procedure were followed, any ceiling breaches would lead to a reduction in member benefits^{[footnote 5]} in order to bring costs back to target. The government is aware that the occurrence of ceiling breaches may support concerns that the mechanism is not working appropriately and in line with the original policy intentions. The GA’s review of the mechanism is currently underway and will examine these concerns. Any changes that the government decides are necessary following the review will take effect ahead of the next (2020) valuations and so will not impact on the 2016 valuations process.

The government has decided that there should not be reductions to member benefits as a result of completing this process for the 2016 valuations, particularly based on a mechanism that may not be working as originally intended. The government has therefore announced that, should results identify ceiling breaches, the impact of these will be waived. This means that the benefit reductions that would be expected following such ceiling breaches will not be implemented. Where results show that a scheme is in the ‘corridor’ or above the ceiling, benefit levels will not be changed as a result of the 2016 valuations.

The government has, however, decided to commit to delivering the impact of any floor breaches that occur. This means that when results have been finalised and implemented, any benefit improvements that are due will be delivered, via increases in benefit accrual and/or reductions in member contributions in respect of service from 1 April 2019.

These decisions apply only to the 2016 valuations. Future cost control policy will be set out once the GA’s review of the mechanism has concluded and any recommendations fully considered by the government.

5. The 2020 valuations

Changes in the employer contribution rates were due to be implemented from April 2023 for the majority of unfunded public service pension schemes. These valuations have already begun, and requires intensive work across schemes, departments and the Government Actuary’s Department (GAD) over several years. Due to interactions with wider pension policies, in particular the implementation of the McCloud remedy reforms, completion of the 2016 valuation process, and the review of the cost control mechanism, work would need to be undertaken in unprecedentedly short timetables to amend employer contribution rates in April 2023.

Any changes to employer contribution rates resulting from the 2020 valuations will therefore be delayed from April 2023 to April 2024. This is an exceptional but necessary decision taken in light of the wider public service pensions landscape.

HMT will publish a new set of draft Directions outlining the policy detail for the 2020 valuations in due course. This will set out the process for schemes to follow to issue results for the 2020 valuations.

1. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/901141/Update_on_the_Cost_Control_Element_of_the_2016_Valuations.pdf (PDF, 139KB) ↩

2. https://questions-statements.parliament.uk/written-statements/detail/2018-09-06/HCWS945 ↩

3. https://questions-statements.parliament.uk/written-statements/detail/2020-07-16/HCWS380 ↩

4. The Ministry of Housing, Communities and Local Government and Ministry of Justice consulted separately in relation to the public service pension schemes under their responsibility, and will also separately confirm the details of how McCloud remedy will work in those schemes. ↩

5. This could be in the form of changes to member contributions. ↩