Guidance

eNews Article: Managing contingent liabilities in the public sector

Published 30 April 2019

Managing contingent liabilities in the public sector

On 21 February 2019 GAD and HM Treasury co-hosted an event to discuss obligations which may arise from uncertain future events (‘contingent liabilities’). The event explored questions as to how departments can best identify, measure, monitor and manage the risks they face; and how HM Treasury can help to further improve the management of these liabilities. This article reports from the event and summarises its key outcomes.

Who attended?

We were pleased to welcome over 60 attendees from across the public sector, representing organisations including: Ministry of Defence, Pension Protection Fund, Ministry of Housing, Communities and Local Government, Local Government Mutual, Department for Education and Department for Transport.

What was discussed?

The event focused on contingent liabilities: for example costs relating to contractual guarantees or natural disasters. Topics covered included:

• Background to the contingent liabilities framework: A framework used to approve new contingent liabilities, developed by HM Treasury.

• Sharing and learning from good practice: Departments provided an overview of their approaches to managing contingent liabilities. In addition, the Department for International Development explained how they helped set up Kenya’s Hunger Safety Net Programme that directly supports Kenyans impacted by droughts.

• Techniques for modelling risk: GAD illustrated how modelling can help support effective contingent risk management, providing demonstrations of:

  1. World Bank case study: GAD has developed tools to help countries understand and develop financing strategies to mitigate against natural disasters

  2. Department for Education (DfE) case study: closer to home, GAD’s scenario modelling is helping DfE to understand its risks, such as the cost of a serious flooding event on academy schools

Looking forward

Attendees contributed to round table discussions that will support an HM Treasury policy paper feeding into 2019 Spending Review. A selection of proposed actions are shown below:

• provide a central source of information, expertise and tools to support departments and decision making
• incentivise the effective risk management of contingent liabilities
• continue to develop the existing contingent liabilities framework

There was a recognition that contingent liabilities stem from long-term risks but government funding and decision-making focuses on a one-year time horizon. Overcoming this remains challenging.

Next steps

A huge thank you to our speakers and attendees for making the event such a success. GAD and HM Treasury plan to keep in touch with attendees and use case studies of current best practises to support policy recommendations. Please contact jonathan.day@gad.gov.uk for a copy of the slides, to contribute your ideas, or if you would like to discuss the topic in more detail.

Developments

Public service pensions valuations – cost control mechanism

In December 2018 the Court of Appeal ruled that the transitional protection offered to some public service pension scheme members as part of the 2015 pension reforms was discriminatory. The government is currently seeking leave to appeal this ruling. In light of the significant but uncertain impact the Court of Appeal judgement may have on accrued pension benefits, HM Treasury (following consultation with the Government Actuary) recently published amended directions to pause the “cost control mechanism” element of the valuations of public service pensions. The part of the valuations which sets employer contribution rates between 2019 and 2023 had already been completed.

Collective Defined Contribution Pension Schemes

The Department for Work and Pensions has published the government’s response to the department’s consultation on delivering collective defined contribution (CDC) pension schemes. (See GAD’s Technical Bulletin for background). In his foreword, Guy Opperman MP, the Parliamentary Under Secretary of State for Pensions and Financial Inclusion, commented that the vast majority of the responses to the consultation were supportive of the proposals. He confirmed that the government intends to move forward with legislating to facilitate CDC provision as soon as parliamentary time allows.

Life expectancy

The UK actuarial profession’s Continuous Mortality Investigation has published a revised projections model for estimating future improvements in life expectancy of the UK population. This model is widely used by actuaries in advising private pension schemes and insurance companies. The update recognises the recent trend of slowing improvements in lifespans. (See GAD’s December 2018 Mortality Insights) for more details. The updated model suggests that the expected average remaining lifespans of people reaching age 65 now could be around six months lower than the model had estimated previously.

Restricting exit payments in the Public Sector

The government has launched a consultation on draft regulations to implement a cap of £95,000 on exit payments, such as payments associated with loss of employment, in the public sector. Powers to cap exit payments were introduced in the Small Business, Enterprise and Employment Act 2015. This consultation sets out secondary legislation to implement this cap, including a proposed method and details of which bodies should be in scope.

Review of the Financial Reporting Council

Following the Kingman Review, the Department for Business, Energy and Industrial Strategy has announced that the Financial Reporting Council (FRC) will be replaced with a new regulator. Currently the FRC oversees the regulation of the actuarial profession in the UK. The review’s final report recommends that the government should review the regulation of the actuarial profession. The report advises that neither the FRC, nor its replacement, is best placed to be the oversight body. No changes in the profession’s oversight or standards have been announced at this stage.