Guidance

Public service pension schemes - SCAPE discount rate methodology: a GAD technical bulletin

Published 30 March 2023

Government consultation

The government has published its response to the public consultation on the discount rate methodology for public service pensions. The response confirmed that:

• the current methodology for setting the discount rate, based on the Office for Budget Responsibility’s (OBR) forecast of long-term GDP growth, has been retained
• in future, the government will aim to review the level of the discount rate once in every 4 year valuation cycle, rather than the current 5 year timetable.

A Written Ministerial Statement confirms that the new SCAPE discount rate is 1.7% a year above the annual rate of the Consumer Prices Index (CPI) of inflation.

What is SCAPE?

SCAPE stands for Superannuation Contributions Adjusted for Past Experience. It is the process for setting employer contribution rates at valuations of unfunded public service pension schemes.

The SCAPE process aims to ensure that the value of pension benefits being promised are recognised at the point at which they are built up. It means that employers pay a charge that is appropriate to reflect this value. It also aims to ensure that total contributions reflect any past over- or under-payments.

A key component of the SCAPE process is the SCAPE discount rate. Pensions are payable over many years into the future. The rate at which those payments are discounted, to produce a value in today’s terms, is highly significant to the calculation of employer contribution rates.

SCAPE discount rate methodology

The consultation sought views on two possible methodologies for the SCAPE discount rate. One method was based on long-term future GDP growth expectations set by the OBR. The second was based on the Social Time Preference Rate (STPR) prescribed in HM Treasury guidance for project appraisal.

The consultation proposed three objectives for making the decision:

• fair reflection of costs
• reflect future risks to government income
• stability

The government concluded that a methodology based on long-term future GDP growth expectations, as set by the OBR, best met the balance of objectives. The consultation response notes that “this methodology will best provide intergenerational fairness by ensuring that pension promises are made in a way that is sustainable and affordable to future taxpayers, which will support the long-term stability of the public service pension system”.

GAD’s involvement

HM Treasury have been working closely with their GAD advisers to understand the technical considerations behind the SCAPE discount rate methodology and implications to the public service pension schemes.

Separately, HM Treasury consulted the Government Actuary, Martin Clarke, on its proposed consultation response. The Government Actuary said that “in the context of the three objectives for the SCAPE discount rate that the government has outlined, I believe that the GDP-based approach proposed is the most appropriate methodology.” In particular he noted that the GDP-based approach “is more directly related to the expected growth in the tax base, which is the source of income from which future pension payments are ultimately funded”.

What will the impact be?

The new annual SCAPE discount rate of 1.7% above CPI is based on the OBR’s latest expected long-term GDP growth figures published in their July 2022 Fiscal Risks and Sustainability report. This discount rate will be used for the ongoing 2020 valuations of unfunded public service pension schemes. These valuations will set the rates of employer contributions payable from April 2024.

This represents a reduction from the previous annual rate of 2.4% above CPI. All else being equal, this change will lead to higher employer contribution rates. Pension payments paid in the future will be discounted at a lower rate and therefore have a higher value in today’s terms.

As set out in the consultation response, the government has committed to providing funding for increases in employer contribution rates resulting from the 2020 valuations as a consequence of changes to the SCAPE discount rate. This commitment is for employers whose employment costs are centrally funded through departmental expenditure.

Next steps

If you’d like to discuss topics in this bulletin or to learn more about the potential impact of the SCAPE discount rate, get in touch with your usual GAD contact.