The Government Actuary’s Department has published the cost cap valuations of four public sector schemes, confirming that the cost of implementing the McCloud remedy has led to a breach of the cost control mechanism, cancelling previously-agreed benefits increases.
The mechanism was introduced to ensure a fair balance of risks between scheme members and the taxpayer. It allows for a plus or minus two per cent corridor that, if breached at subsequent valuations, requires that action be taken to bring costs back within the target range.
It was paused following the McCloud judgement because it produced what Martin Clarke, the government actuary, called “perverse” results, with most schemes breaching their cost cap floor, which would compel them to increase member benefits.
The GAD warned at the time that the fact 60 per cent of the cost reduction leading to the floor breach occurred in legacy schemes, the mechanism only led to benefit changes in reformed schemes, which could have produced intergenerational unfairness.
Depending on the details of the directions for the 2020 valuations, any difference between the actual cost of remedy as it emerges and the cost anticipated in this valuation may affect future cost control valuations
GAD
HM Treasury announced the resumption of the cost control mechanism in October last year, meaning schemes’ 2016 valuations could finally conclude. It followed amendments to the mechanism proposed by GAD and accepted by the Treasury that would see the corridor widened to three per cent from plus or minus two per cent, alongside the introduction of an economic check linked to long-term GDP expectations.
These reforms have yet to be enacted by legislation, and even if they had been, the substantial costs of the McCloud remedy mean the three schemes that have breached the cost cap ceiling would still have done so under the reformed mechanism.
The government has been harshly criticised for its plans to place the burden of the McCloud remedy on public sector schemes’ 2016 valuations, with the Public Accounts Committee stating that the government was, in effect, forcing members to pay for Treasury mistakes.
The government announced in February that the consequences of breaching the ceiling would be waived, but a number of unions have filed for judicial review and some have threatened other legal actions to challenge the move, as the inclusion of McCloud costs means previously agreed contribution rate cuts and benefit increases — resulting from the floor breach — will no longer go ahead.
Three of four schemes breach the cost cap
GAD released the cost cap valuations of four public sector schemes on April 7, revealing the results for the Police Pension Scheme (England and Wales), the Civil Service Pension Scheme, the Firefighters’ Pension Scheme (England) and the Firefighters’ Pension Scheme (Wales).
Of these, the only scheme not to breach the cost cap was the CSPS, in which the cost of the McCloud remedy was substantially lower than in the other three schemes.
The FSPS (England) had its employer cost cap set at 16.8 per cent following the 2012 valuation, but the 2016 valuation showed the cost cap cost of the scheme — calculated as the employer contribution correction cost plus the transitional protection remedy cost — exceeded that limit by 14.6 per cent, for an overall cost cap cost of 31.4 per cent.
The employer contribution correction cost was just 11.6 per cent, which would have breached the floor and led to benefit increases, but the McCloud remedy cost added an extra 19.8 per cent, ensuring that the ceiling was breached.
A similar scenario unfolded in two of the remaining three schemes. The FSPS (Wales) had an employer contribution correction cost of 12.3 per cent, but the McCloud remedy added 17.7 per cent, the total 30 per cent cost cap cost breaching the scheme’s 17.1 per cent cost cap.
The PPS (England and Wales), meanwhile, had an employer contribution correction cost of just 7.5 per cent, but the 18.1 per cent added by the McCloud remedy ensured that the scheme breached its 12.8 per cent cost cap by 12.8 per cent.
In each case, regulations require that action be taken to bring the schemes back to their target cost cap. Though the Treasury plans to waive the consequences of the ceiling breach, those changes have yet to receive royal assent, and GAD suggested the affected schemes might wish to take legal advice on any immediate actions required in the interim.
The only scheme not affected was the CSPS, which had an employer cost cap of 18.5 per cent. The employer contribution correction cost was 13.1 per cent, but the McCloud remedy cost only added 5 per cent, meaning the cost cap cost ended up 0.4 per cent below the cost cap.
Uncertainty remains
Firefighters prepare fresh legal action against govt
Firefighter representatives and the Local Government Association have written jointly to the government raising the possibility of legal action if steps are not taken to compensate members affected by the remedy period resulting from the McCloud judgment.
GAD qualified its figures by saying that, until the planned cost control mechanism reforms become law and attendant directions are published, there remains considerable uncertainty around the full impact of its review, and about the remedy costs in particular.
Additionally, “the remedy cost calculations are subject to a number of uncertainties, including in relation to eligibility data, future salary increases and future retirement ages,” it explained.
“Depending on the details of the directions for the 2020 valuations, any difference between the actual cost of remedy as it emerges and the cost anticipated in this valuation may affect future cost control valuations.”
