Policy paper

Public Service Pensions – Cost Control Mechanism and the Reformed Scheme Only Design

Published 15 May 2023

This was published under the 2022 to 2024 Sunak Conservative government

This policy statement provides further details on how the ‘reformed scheme only’ design of the public service pensions cost control mechanism will operate from the 2020 valuations onwards, including the interaction with McCloud remedy.

1. The Cost Control Mechanism

The cost control mechanism (CCM) is designed to ensure a fair balance of risk with regard to the cost of providing public service defined benefit (DB) pension schemes between members of those schemes and the Exchequer (and by extension taxpayers). If, when the CCM is tested, those costs have increased or decreased by more than a specified percentage of pensionable pay compared to a target cost, then member benefits (and/or member contributions) in the relevant scheme are adjusted to bring the cost of that scheme back to target.

Following a review by the Government Actuary, and a full and public consultation process, the Government confirmed in October 2021 that it would implement 3 reforms to the CCM in time for the 2020 valuations:

1. Reformed scheme only design;
2. Wider 3% cost corridor; and
3. Economic check.

2. The Reformed Scheme Only Design

This statement provides further details on how the reformed scheme only design will operate. As set out in the Government’s consultation response, the reformed scheme only design means that from the 2020 valuations onwards, the CCM will only consider past and future service, in the reformed schemes, with all legacy scheme costs excluded. This will lead to a more stable CCM and ensure consistency between the set of benefits being assessed and the set of benefits potentially being adjusted. Although it will mean that the Exchequer will take on the full risk of costs of the legacy schemes in the unfunded schemes, the Government believes this is the right approach to take in order to ensure the CCM is fairer to younger members who did not previously have access, or had access for a shorter time, to the legacy schemes.

The details that follow cover all the main public service pension schemes except the judicial pension scheme. This is because judicial members have a new scheme. Details about how the CCM will operate in that scheme will be announced separately in due course.

3. Unfunded public service pension schemes

For the unfunded schemes (NHS, Teachers, Civil Service, Armed Forces, Police and Fire), reformed schemes were introduced on 1 April 2015. Moving to a reformed scheme only design CCM will mean that all accrued service on or before 31 March 2015 will be excluded from the CCM, as this service is exclusively in the legacy schemes.

When the reformed schemes were introduced, the Government agreed, following discussions with trade unions, to allow active members of the legacy schemes who were close to retirement to remain in those schemes, rather than requiring them to start to accrue pension benefits in the new reformed schemes. This was called transitional protection. A judgment by the Court of Appeal found transitional protection to be unlawfully discriminatory. The Public Service Pensions and Judicial Offices Act 2022 (“the Act”) implements measures which will remedy this discrimination. For the period 1 April 2015 – 31 March 2022, the Act ensures that eligible members will be offered a choice between legacy and reformed scheme design benefits at retirement. From 1 April 2022, the Act ensures that all active members are in the reformed schemes.

Thus, all service from 1 April 2022 onwards will be included in the CCM, as it will be exclusively in the reformed schemes.

The retrospective McCloud remedy will operate over the period 1 April 2015 – 31 March 2022. For this period, the reformed scheme only design will operate as follows:

• For members out of scope of remedy, all service over this period is in the reformed schemes and benefits will be paid out of the reformed schemes. This service will be included in the reformed scheme only CCM.
• Members in scope of remedy will be able to choose between legacy or reformed scheme design benefits for this period. Regardless of the choice made, these benefits will be paid out of the legacy schemes. Service for members in scope of remedy over this period will be excluded from the CCM.

4. Local Government Pension Scheme

The Local Government Pension Schemes (LGPS) are funded schemes.

A different approach to pension reforms was adopted for LGPS, where all members still accruing benefits were moved to reformed schemes either on 1 April 2014, for the LGPS England and Wales, or 1 April 2015, for LGPS Scotland and LGPS Northern Ireland. In those schemes, members closer to retirement were provided with an underpin – giving them the better of accrual as if under their previous legacy scheme provisions or under the reformed scheme provisions, for pensionable service from the date they moved to their new LGPS scheme.

For these LGPS schemes, the McCloud remedy will ensure the underpin will be extended to all those members affected by the discrimination. The underpin will not apply to service after 31 March 2022 or for service rendered after the member’s Normal Pension Age (NPA), if earlier.

For LGPS, the reformed scheme only design will mean that all service on or before 31 March 2014 or 2015 (as appropriate) will be excluded from the CCM, as this service is in the legacy schemes. All service from 1 April 2022 onwards will be included in the CCM, as this service is in the reformed schemes.

For the period 1 April 2014 or 2015 – 31 March 2022, over which the McCloud remedy will operate, all service will be included in the CCM, but the impact of the underpin will be excluded. This approach will ensure that, for the LGPS, the impact of the legacy scheme benefit design can be excluded from the CCM.

5. Summary

Collectively, the approaches to the reformed scheme only design CCM for both the unfunded and LGPS schemes aim to ensure that only costs of the reformed schemes will be assessed by the CCM from the 2020 valuations onwards. As the McCloud remedy relates to the legacy schemes, this impact will be removed, so that the remedy will not materially impact the CCM from the 2020 valuations onwards.

Remedy was included in the CCM at the 2016 valuations given the design of the mechanism at the time which considered certain legacy scheme costs. This is because by increasing the pension rights of eligible members, remedy increases the value of schemes to members. However, the Government previously announced that it would waive ceiling breaches that may occur at the 2016 valuations as it did not think it would be right to reduce member benefits based on a CCM that may not be working as intended and which it had asked the Government Actuary to review. The waiving of ceiling breaches was subsequently implemented through the Public Service Pensions and Judicial Offices Act 2022 (PSPJOA 22), which means that no member benefits have been cut as a result of the 2016 valuations.

Following the Government Actuary’s review, the Government has since concluded the CCM is not working as intended, so has taken the decision to reform the CCM from the 2020 valuations onwards. The reformed scheme only design is an important aspect of these reforms and will ensure a more stable mechanism going forward.

Using the powers in the Public Service Pensions Act 2013, as amended by the PSPJOA 22, HM Treasury will, in due course, set out in Directions the technical detail of how the costs should be taken into account at the 2020 valuations, including in relation to the reformed scheme only design, as well as the economic check. The statutory instrument to implement the wider 3% cost corridor was laid in Parliament on 13 July 2022.