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.

 

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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.

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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

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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.

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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.

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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.

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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.

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The valuation results show that the cost of providing pensions has increased.  Therefore, the Government has 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 took effect from 1 September 2019 to align with the academic year and allow employers additional time to plan for its implementation.

Answer:

Member contribution rates have not changed as a result of the valuation.  There will, however, be the usual annual review of the contribution salary bands to reflect changes to inflation. Adjustments to the bands are effective each year in April. The current member contribution rates can be found here.

Answer:

If your employer chooses to leave the Teachers’ Pension Scheme, they’ll be required to enrol you into another pension scheme. If the new scheme that your employer offers is a ‘Defined Benefits’ scheme then you may be able to transfer your teacher’s pension over to it, as long as you do this within 12 months of entering the new scheme.

If you choose to leave your benefits in the Teachers’ Pension Scheme they'll continue to be index-linked, in line with the annual Pensions Increase, and you’ll be able to apply for your pension benefits from the age of normal minimum pension age (currently 55).

Some Independent schools have decided to participate in a phased withdrawal, which will impact whether you may remain a member of the Teachers’ Pension Scheme. For information about this, please visit the section of our website dedicated to Phased Withdrawal.

Answer:

The cost control mechanism was introduced in 2015 with the public service pension scheme reforms.

It’s part of the valuation process to ensure the costs of public service pensions remain sustainable, protecting the taxpayer from increased costs; but also maintaining the value to members when costs fall.

Answer:

The government has set out how the cost control part of the 2016 valuations will be completed. This determines how the cost cap calculations are to be completed for the Teachers’ Pension Scheme. The part of the 2016 valuations that determined the employer contribution rate will not be re-visited.

Answer:

The government announced in September 2018 that it would ask the government Actuary to review the cost control mechanism. This was in the context of the provisional results of the 2016 valuations, which indicated that the mechanism, as currently designed, is too volatile.

The government Actuary’s final report sets out that the mechanism is not currently meeting its objectives and could be improved in a number of ways.

Answer:

The proposed changes are not designed to cut member benefits. It’s expected that the reforms will make benefit changes (both cuts and increases to member benefits) less frequent. This is in line with the government's intention to establish a fairer balance of risks between the taxpayer and scheme members.

Answer:

All the government’s proposals are in line with changes recommended by the Government Actuary. These recommendations were intended to be considered in various combinations and not advocate implementing all of the recommendations.

The government believes that its combination of proposals will establish a fairer balance of risks between the taxpayer and scheme members and create a more stable mechanism. The government sets out the reasoning behind its proposals in detail in its consultation, as well as its reasoning for not proposing on some options.

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The aim is to implement the changes to the cost control mechanism ahead of the completion of the 2020 valuations process. The government will legislate for these changes once it has responded to the consultation and when parliamentary time allows.

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The 2016 valuations will not be affected by these proposed changes as the government aims to implement its proposed changes ahead of completion of the 2020 valuations process.

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The Government is currently setting out the detail of how the cost control element of the 2016 valuations will be completed.