Scheme valuations and the cost control mechanism
Consultation on the cost control mechanism - updated August 2021
The Government has considered the Government Actuary’s final report on his review of the cost control mechanism and concluded that changes are necessary to ensure it operates in line with its objectives.
The Government was consulting on changes to the mechanism, with a view to establishing a fairer balance of risks between the Exchequer and scheme members, creating a more stable mechanism and taking account of the wider economic picture.
The Government’s proposals were in line with changes recommended by the Government Actuary, and any changes made as a result of the consultation will be part of the 2020 valuation process.
The consultation on GOV.UK (opens in a new window) ran from 24 June to 19 August. HM Treasury are now analysing the feedback and will update on the consultation shortly.
For more information, please read the Cost control mechanism consultation FAQs.
Cost Control Element of the 2016 Valuations
In January 2019, the government announced a pause to the cost control mechanism in public service pension schemes, due to uncertainty about benefit entitlements arising from the McCloud judgment.
The pause was lifted and the government has confirmed that as addressing the discrimination identified in the McCloud and Sargeant judgments involves increasing the value of schemes to members; the costs associated with this therefore fall into the ‘member cost’ category. As a ‘member cost’, this will be considered as part of the cost control element of the valuations process. However, should results identify ceiling breaches, the impact of these will be waived. When results have been finalised any improvements that are due as a result of a floor breach will be delivered.
If you would like information about the valuation of the Civil Service Pension Schemes as at 31 March 2016, go to the about us section.
Background to the cost control mechanism (also known as the cost cap)
The Independent Public Service Pensions Commission recommended in 2011 that the new public service pension schemes should include an employer cost control mechanism to protect the taxpayer from unforeseen increases in scheme costs.
The original objectives of the cost control mechanism are summarised:
- To protect the Exchequer and taxpayers from unforeseen costs;
- To maintain the value of a public service scheme to its members; and
- To provide stability and certainty on member benefit and contribution levels – the mechanism should only be triggered by ‘extraordinary, unpredictable’ events.
The government made provisions to establish the cost control mechanism in the Public Service Pensions Act 2013.
The control mechanism is expressed as a percentage of pensionable pay. The upper margin forms a ‘ceiling’ and the lower margin forms a ‘floor’. For example, if the employer cost cap is set at 14 percent of pensionable pay, the ceiling and floor would be set at 16 and 12 percent respectively.
Where the cost of a scheme goes beyond those margins on either side of the employer cost cap, pension benefits or member contributions must be adjusted to bring costs back to the target.