Valuation

Answer:

The Amending Directions, which were signed and published on 7 October 2021, amend the original Public Service Pensions (Valuations and Cost Cap) Directions from 2014.

Following the pause to the cost cap element of the 2016 valuations in 2019 in the wake of the McCloud and Sargeant judgments, the Amending Directions un-pause the 2016 valuation process and allow schemes to complete the 2016 cost cap valuation process.

As the government’s policy to remedy the discrimination identified by the courts in the McCloud and Sargeant judgments will involve an increase in the value of eligible members’ pension benefits, it’ll be captured in the completion of these valuations.

The Amending Directions instruct schemes on how McCloud remedy should be considered in calculations and the assumptions they should apply when doing so.

 

Answer:

The courts’ judgments in the McCloud and Sargeant litigation meant that there was uncertainty as to the value of members’ benefits. As a result, the government announced in 2019 that the cost control element of the 2016 valuation process would be paused.

While the government recognises the uncertainty this caused for members, it was right to pause the mechanism at this time as the litigation made it impossible to properly assess the value of member benefits at the 2016 valuation process.

The government worked with stakeholders to develop proposals to remedy the discrimination identified by the courts in the McCloud and Sargeant litigation and launched a consultation on these proposals in July 2020. The publication of the consultation meant that uncertainty about scheme benefits had reduced. Alongside the consultation, they announced that the Cost Control Mechanism would be un-paused, and the 2016 valuations completed.

HM Treasury has engaged closely with stakeholders to ensure the Amending Directions support schemes to accurately reflect changes to the value of member benefits because of the McCloud remedy. Drafts of the Amending Directions were shared with schemes and Scheme Advisory Boards to allow feedback and provide them with the opportunity to make any necessary updates to their 2016 valuation data and assumptions.

By publishing these Amending Directions schemes are now able to finalise the results of the 2016 valuations and provide certainty to scheme members.

Answer:

The cost cap element of the 2016 valuations was not completed before it was paused because of the McCloud and Sargeant judgments.

It was right to pause the mechanism at this time as the uncertainty arising from the McCloud and Sargeant judgments made it impossible for them to properly assess the value of member benefits at the 2016 valuation process.

While provisional results prior to the pause showed that several schemes had breached their cost cap floors, these were never finalised and didn’t consider the increased value in members’ benefits because of the McCloud remedy.

If the Cost Control Mechanism hadn’t been paused, schemes may have adjusted benefits based on incorrect assumptions about benefit entitlements. The Government Actuary agreed that the policy of pausing the mechanism was reasonable.

Answer:

When the Cost Control Mechanism was established, it was agreed that it would only consider costs that affect the value of the schemes to members (known as ‘member costs’).

Addressing the discrimination identified in the McCloud and Sargeant judgments by giving members a choice of scheme benefits for the remedy period involves increasing the value of schemes to members. The costs associated with this therefore fall into the ‘member cost’ category.

As a member cost, the McCloud remedy will be considered in the completion of the cost control element of the valuations process.

Answer:

The Cost Control Mechanism is intended to maintain the value of benefits to members while protecting taxpayers from unsustainable increases in costs.

The cost control element of the 2016 scheme valuations was paused due to the uncertainty arising from the McCloud and Sargeant judgments. It’s important to ensure that this process is now completed and that public service pension schemes are subjected to cost control, to protect taxpayers and provide certainty to members.

However, the government has previously confirmed that any ceiling breaches identified at the 2016 valuations will be waived. It would be inappropriate to reduce member benefits based on a mechanism that it plans to reform to ensure it’s working as intended.

 

Answer:

No, the government believes it’s right to capture the full impact of remedy at the 2016 valuations, given the remedy period will end by the end of the implementation period for this set of valuations. This means that remedy will not need to be allowed for at future valuations.

In addition, one of the government’s aims for how the remedy should be dealt with in completing the 2016 cost cap valuations is that it should not unduly reduce intergenerational fairness.

Capturing remedy over four years also more closely aligns those who benefit from remedy with those who pay for it. A long spreading period would likely exacerbate intergenerational unfairness.

The Government Actuary has advised that a four-year spreading period is a reasonable way of achieving the intergenerational fairness objective.

Answer:

The design and nature of the Cost Control Mechanism is such that it’s not possible to exactly align the costs that trigger a breach with those who will be affected by any resulting rectification.

It’s nevertheless important for the sustainability of public service pension schemes that changes that lead to increased benefit payments to members are recognised and allocated as member costs in the Cost Control Mechanism.

Addressing the discrimination identified in the McCloud and Sargeant judgments – giving members a choice of scheme benefits for the remedy period - involves increasing the value of schemes to members. It’s therefore right that remedy is considered in completion of the 2016 cost control valuations.

Capturing remedy over four years also more closely aligns those who benefit from remedy with those who pay for it. A long spreading period would likely exacerbate intergenerational unfairness.

Answer:

The Amending Directions specify that the assumptions used to calculate the cost of remedy are only updated relative to the assumptions used to calculate the provisional results where they have been affected by the implementation of remedy.

The Government Actuary has said this isn’t unreasonable, given the 2016 cost control calculations are now being unpaused specifically to take account of remedy. This approach has been discussed with the Teachers’ Pension Scheme Advisory Board consisting of member and employer representatives.

Answer:

These Directions ensure that the 2016 valuations capture the entire expected cost of the McCloud remedy. This means that the McCloud remedy would only need to be allowed for at future valuations where the remedy causes a change in future member behaviour that differs from that expected at the 2016 valuation.

The government has announced that from the 2020 valuations the Cost Control Mechanism will only consider costs in the reformed schemes. The government will provide further details on how the reformed scheme only design will be implemented at the 2020 valuations and beyond, and the extent to which there will be any interaction with the McCloud remedy at future valuations, in due course.

Answer:

Provisional results prior to the pause showed that a number of schemes were expected to have floor breaches. However, these results were never finalised and didn’t consider the increased value in members’ benefits arising from the McCloud remedy. By publishing these Amending Directions schemes should now be able to finalise the results of the 2016 valuations with the McCloud remedy considered.

As remedy will increase the value of benefits to members, the cost of those schemes will have increased relative to the provisional results prior to the pause.

The Government Actuary has stated that indicative results from the 2016 cost cap valuations, based on these Amending Directions, suggest that no scheme will see floor breaches while some schemes may see ceiling breaches. The valuation reports have been completed and finalised based on the final Amending Directions, the results of which can be found here (This link opens in a new window).

Answer:

No, the 2016 valuations won’t be affected by these reforms. These valuations have been completed in line with the original design of the Cost Control Mechanism.

The reforms to the Cost Control Mechanism set out in the government’s response to its recent consultation will be implemented ahead of the 2020 valuations process.

Answer:

In finalising these Directions ministers have complied with their Public Sector Equality Duty.

The design and nature of the Cost Control Mechanism is such that it’s not possible to exactly align the costs that trigger a breach with those who will be affected by any resulting rectification.

In particular, because of including the remedy cost as a member cost at the 2016 valuations, some members who aren’t eligible for remedy will nevertheless bear some of the cost. These members are more likely to be younger than members who are eligible for remedy. Younger members in some workforces are also more likely to have other protected characteristics.

By capturing the entire cost of remedy at the 2016 valuations and spreading these over four years, the government has made efforts to mitigate the impact of this on younger members by limiting the extent to which remedy will affect the outcome of future valuations, where those who will be affected are less likely to have been eligible for remedy.

 

Answer:

Yes, Draft Amending Directions were shared with schemes and Scheme Advisory Boards to provide feedback. In line with its statutory requirements, the government has also sought the formal view of the Government Actuary on these Directions.

Answer:

No, the government has announced that any ceiling breaches identified at the 2016 valuations will be waived. It’s legislating for this in the Public Service Pensions and Judicial Offices Bill that is currently before Parliament.

The government has decided that it would be inappropriate to reduce member benefits based on a mechanism that it doesn’t believe is working as intended. However, any benefit increases due as a result of floor breaches will be delivered.

Answer:

Schemes will now complete final valuation reports. If any floor breaches are identified, they’ll be expected to begin discussions on how to increase benefits to bring costs back to the target level in line with the statutory rectification process.

If pushed: The Government Actuary has stated that indicative results from the 2016 cost cap valuations based on draft Amending Directions suggest that no scheme will see floor breaches while some schemes may see ceiling breaches. However, outcomes won’t be certain until valuation reports have been completed and finalised based on the final Amending Directions.

Answer:

Employer contribution rates are currently set until April 2024, when they’ll be reviewed as part of the 2020 valuations. The 2020 valuations will be subject to a number of assumptions and factors that are yet to be confirmed. The outcome is therefore highly uncertain and could result in either an increase or decrease in contributions.

Answer:

Following the scheme valuation, member and employer representatives came together to discuss changes to the member benefit structure to return pension benefits back to the level agreed in 2015. Those discussions led to a recommendation that, for the Teachers’ Pension Scheme, the rate at which pensions accrue should be improved.

Answer:

Every four years, the Government Actuary’s Department (GAD) carries out a valuation of all unfunded public service pension schemes. Teachers’ Pensions is one of these schemes.

Answer:

The valuation is the process by which scheme costs are measured and managed. It assesses the long-term cost of providing pensions and other benefits to members of each public service pension scheme and determines the appropriate employer contribution rates going forward.

Answer:

The valuation results showed that the cost of providing pensions had increased. Therefore, the Government decided that the employer contribution rate to the Teachers’ Pension Scheme should increase to 23.68% (including the administration levy of 0.08%). The changes to the employer contribution rate tool effect from 1 September 2019.

Answer:

In short, nothing. As soon as the outcome of the Employer Tribunal is known we’ll inform you of the result and provide as much information as possible.

Answer:

We’ll provide further information on likely timescales when we’re made aware of them.

Answer:

The valuation results show that the cost of providing pensions has increased. The Government decided to increase the employer contribution rate to the Teachers’ Pension Scheme to 23.68% (including the administration levy of 0.08%), with effect from 1 September 2019. This aligned the increase with the academic year and allowed employers additional time to plan for its implementation.

Answer:

The higher contribution rate was introduced from 1 September 2019. Although this could have been effective from 1 April 2019, the Government decided it was more appropriate to implement the revised employer contribution rate for the Teachers’ Pension Scheme on 1 September 2019, to align with the academic year and allow employers additional time to plan for its implementation. The Department for Education consulted on the additional funding that may be provided to some Teachers' Pensions Scheme employers to cover the additional costs.

Answer:

The Government has estimated that the cost of any likely adjustment to benefits will be at least similar to the cost of the proposed benefit improvements on which the revised employer rate is based.

If the revised employer contribution rate were not implemented from September 2019 as expected, a significant scheme deficit would occur. If that happened, there would need to be a further increase to the employer rate to address the deficit.

 

Answer:

Costs relating to member experiences have fallen as a result of reforms, however member costs are just one factor used to determine the cost of the Scheme.

The cost of providing pensions is determined by a number of factors, including key assumptions on the ‘discount rate’. Future payments are discounted using the ‘discount rate’ to provide a cost of providing benefits in today’s terms. If the discount rate is reduced it means that the cost today, to provide benefits in the future, increases.

HM Treasury reduced the discount rate for public service pensions to reflect the lower expected future growth in the economy.

Answer:

The cost of providing pensions is determined by a number of factors, including the assumptions adopted for the scheme valuation. The key assumption leading to the increase in costs is the ‘discount rate’. Future payments are discounted using the ‘discount rate’ to provide a cost of providing benefits in today’s terms.

HM Treasury changed the discount rate for public service pensions to reflect the lower expected future growth in the economy. A lower discount rate means a higher cost of providing benefits.

Answer:

The Department for Education concluded a consultation on the proposed funding arrangements. The consultation set out the Department’s proposal to fund those employers who are most reliant on government grants. Responses to the consultation are currently being analysed and a final decision on the funding position will follow.

Answer:

Independent schools participate in the Teachers’ Pension Scheme on a voluntary basis and can therefore leave the Scheme at any time. The school or it’s representative(s) must write to Teachers’ Pensions setting out the date from which participation in the Scheme will cease.

Once you leave the Scheme, all your employees will cease to be eligible to participate and their pension provision will become deferred. Further information on how to leave the Scheme can be found in our checklist.

From 1 August 2021, Phased Withdrawal for Independent Schools was introduced which saw the changing of the participation rules. More information on this can be found here.

Answer:

You can choose to leave the Teachers’ Pension Scheme but you’ll be required to consult with your staff on any changes and enrol your employees into another qualifying pension scheme. We recommend you take advice if you choose to follow this route.

If the new scheme that you offer is a ‘Defined Benefits’ scheme then your employees may be able to transfer their teacher’s pension over to it, as long as they do this within 12 months of entering the new scheme.