Date posted: 01/10/2008
Audience: This Notice will be of particular interest to:
- HR Managers and policy teams
- Finance Managers involved in budgeting for pay and pension costs
- HR staff responsible for pension communication
Action: Please issue Pension Reform Newsletter 4 to all staff
- The programme of Civil Service pension reform has been intended to put the pension arrangements onto a basis which is affordable now, sustainable in the future and appropriate to meet the needs of employers and the workforce. As such, there are a number of components to the package of reform, and these were announced in July 2007 in a Written Ministerial Statement by the then Cabinet Office minister Gillian Merron MP (see EPN186). We have already introduced a new pension scheme (nuvos) for new entrants from 30 July 2007, replaced added years with added pension and made improvements to the other pension schemes (classic, premium and classic plus) to take advantage of flexibilities permitted by the changes to the tax rules.
- The two remaining elements of the package are the introduction of:
(a) a Governance Group; and
(b) a framework for handling future cost pressures on the scheme. We have now made the necessary amendments to the pension scheme rules to complete the current programme of pension reform.
- The purpose of the Governance Group is
(a) to provide a mechanism through which the service delivery of the Civil Service pension arrangements is monitored independently; and
(b) to play a role in ensuring that pension scheme members and their employers have involvement in the process for reviewing PCSPS scheme costs.
- The Governance Group will not have executive powers. Its purpose is neither to negotiate benefit changes nor the form of any sharing of cost increases; the forum for discussions of this kind will continue to be the Joint Committee on Superannuation (JCS), where Cabinet Office represents the employer side and the Trade Union Side is represented by the Council of Civil Service Unions (CCSU).
- The Governance Group, supported by Civil Service Pensions Division (CSPD), will be responsible for monitoring service standards and scheme governance and providing advice to the Accounting Office and to the Cabinet Office Audit and Risk Committee (COARC). It will be involved in future actuarial reviews of the scheme (the next is scheduled to take place in 2010), recommending to Cabinet Office actuarial assumptions (other than those set by the Treasury) based on scheme experience etc. In the event that costs increase at a future valuation, the Group will consider options for dealing with the increase. It is not, though, for the Group to make decisions on how any cost sharing measures are implemented.
- The Governance Group will be made up of 5 representatives nominated by the CCSU and 5 by Cabinet Office. The Civil Service Pensioners Alliance (CSPA) will, at the invitation of the Group, participate in discussions affecting their membership. CSPA representatives will have observer status. The Chair of the Group will be an independent non-executive chair appointed by Cabinet Office in consultation with CCSU. It is anticipated that the Group will meet quarterly.
- The members of the Group will be expected to represent the interests of the scheme as a whole and not simply the interests of the constituency that nominated them. The Cabinet Office is responsible for setting and reviewing the Group’s terms of reference, and reviewing the need for the Group’s continued existence. Any changes arising from such reviews would be subject to consultation with the CCSU. CSPD will provide the Secretariat for the Group.
- The Group will meet for the first time in October when it will agree its ways of working. It will also be provided with initial background on the Civil Service pension arrangements, on the administration structure – including roles and responsibilities – and on the governance arrangements.
- At its second meeting, scheduled for January 2009, it is proposed that the Group will review administration performance and service standards.
- In common with the other main public service schemes, the PCSPS will share the effect of cost pressures, arising at future actuarial valuations of the scheme, between employers and employees. Hitherto, the effects of cost pressures have been reflected only in employer contributions (ASLCs). The average ASLC will also be capped at a maximum of 20% of pay on current assumptions. (The average ASLC is currently 19.4% of pay and will drop to 18.9% from April 2009 when the outcome of the 2007 valuation is implemented – see EPN201.)
- The scheme rules set out the procedure to be followed after future actuarial valuations, the first of which is scheduled to take place as at 31 March 2010. Subsequent valuations will take place at intervals not exceeding four years. The procedure will work as follows:
(i) The Scheme Actuary will produce an initial report which will provide both the overall scheme cost (expressed as a percentage of pensionable payroll and net of contributions being paid by active members) and an analysis of the movement in scheme cost since the previous valuation.
(ii) The Cabinet Office, as scheme managers, will use this analysis to determine the average ASLC. In the event that costs have come down, the average ASLC will remain at the same level as before, thus building up a cushion to be offset against future cost increases.
(iii) The Cabinet Office will also determine the employee share of any cost increase, and ask the Governance Group to report on options for eliminating it. Having received the Governance Group’s report, the Cabinet Office will consult the CCSU on the approach it plans to take. If necessary, the Cabinet Office will then make appropriate amendments to the pension scheme rules. The Scheme Actuary will publish his final report which will include details of the steps taken to handle cost pressures.
(iv) The overall timeline for the process is prescribed in the rules and is as shown in the annex attached to this EPN (dates are “no later than”). Further information, including worked examples, can be found on the Pension Reform pages of the Civil Service Pensions website.
- Employers should be aware that not all cost pressures and savings will be shared. Specifically, the following are excluded from cost sharing (meaning that the full impact will fall to the employer):
- savings which feed through as a result of new entrants going into nuvos rather than into premium;
- changes to the costs of administering the scheme; costs/savings arising as a result of a change in actuarial methodology; and
- costs/savings arising as a result of the Treasury changing the financial assumptions (such as the discount rate)
- The timetable means that Cabinet Office will advise employers of the new ASLC rates a full 12 months before they come into effect. Employers will therefore be notified, by the end of March 2011, of the ASLC rates applicable from April 2012.
- If cost pressures arise at future valuations, it is possible that the employee share may be handled by increasing employee contributions (currently 1.5% for members of classic and 3.5% for members of premium, nuvos and classic plus). But Cabinet Office expects that other options, including changes to scheme structure, will also be considered at the time.
This document refers to EPN186 and EPN201
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