FAQs: Scheme valuations and the cost control mechanism

Why is the Government proposing making changes to the cost control mechanism?

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.

All the Government’s proposals are changes recommended by the Government Actuary.

Will these reforms result in cuts to member benefits?

The proposed reforms are not designed to cut member benefits. It is 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, and to create a more stable mechanism.

All the Government’s proposals are in line with changes recommended by the Government Actuary.

Why is the government making it more difficult for schemes to increase member benefits?

The Government believes that its proposed reforms will create a more stable mechanism. Since the mechanism is symmetrical, this will equally apply to both the taxpayer and the member by making breaches of both the ceiling and the floor less likely.

While the Government’s proposals would make benefit increases less likely, they would also make benefit cuts less likely, in line with the mechanism’s original objective of stability and the intention to protect both member benefits and the taxpayer.

Why is the Government not consulting on all the changes proposed by the Government Actuary?

All the Government’s proposals were in line with changes recommended by the Government Actuary.

The Government Actuary’s recommendations were intended to be considered in various combinations. The Government Actuary did not advocate implementing all of his 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 set out the reasoning behind its proposals in detail in the consultation (which is now closed), as well as its reasoning for not proposing some options.

How/when will the Government implement these reforms?

The Government is aiming 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.

Why was the consultation process only eight weeks long?

The Government is working at pace to implement its proposed changes ahead of completion of the 2020 valuations process and actively sought views to help it develop its proposals.

Why is the Government going back on commitments of ‘technical immunity’ for members?

The Government Actuary has carried out a comprehensive review of the cost control mechanism and concluded that it cannot protect the taxpayer without making some allowance for the wider economic situation.

Based on the Government Actuary’s findings, the Government judges that it is right to now allow for changes to the wider economic situation, albeit in a limited way, to be considered in the cost control mechanism via an economic check.

Under the proposed design, benefits would not be reduced if the country could afford to continue paying the current level of benefits. Similarly, benefits would not be increased if the country could not afford to pay these increases. A change in long-term economic factors could not in itself cause a change to member benefits.

Why was the Government proposing using the SCAPE discount rate in the economic check? Is this a way of gaming the system/preventing floor breaches?

The Government Actuary has carried out a comprehensive review of the cost control mechanism and concluded that it cannot protect the taxpayer without making some allowance for the wider economic situation.

Based on the Government Actuary’s findings, the Government judges that it is right to now allow for changes to the wider economic situation, albeit in a limited way, to be considered in the cost control mechanism via an economic check.

Under the proposed design, a change in long-term economic factors could not in itself cause a change to member benefits. In simple terms, benefits would not be reduced if the country could afford to continue paying the current level of benefits. Similarly, benefits would not be increased if the country could not afford to pay these increases.

The Government Actuary has recommended an economic check linked to the SCAPE discount rate as, under the current methodology, the SCAPE discount rate is set based on expected long-term GDP.

The Treasury was consulting on the SCAPE discount rate methodology  in parallel to the cost control mechanism consultation. If the methodology changes following the outcome of that consultation, an alternative discount rate would likely need to be applied to the economic check. The Government was seeking views on the appropriate discount rate to use for the economic check. This consultation closed on 19 August also.

Does the Government think the mechanism is broken because of the floor breach?

The Government Actuary carried out a comprehensive review of the cost control mechanism and concluded that changes are needed in order to ensure that the mechanism works in line with its original objectives.

The Government believes that the proposed reforms will establish a fairer balance of risks between the taxpayer and scheme members, and create a more stable mechanism. 

All the Government’s proposals are in line with changes recommended by the Government Actuary.

Will this impact the 2016 valuations?

The 2016 valuations will not be affected by these proposed reforms.

The Government is working at pace to implement its proposed changes ahead of completion of the 2020 valuations process.

When will the 2016 valuations be finalised?

HM Treasury has set out in amending Directions the detail of how the cost control element of the 2016 valuations will be completed. 

HM Treasury has shared the amending Directions with public sector schemes so that, by engaging with Scheme Advisory Boards (SABs), schemes are able to update the 2016 valuation assumptions and/or collect additional data where this would be necessary to complete the cost control element of the 2016 valuations. Following engagement with SABs, final versions of the Directions will be published, and schemes will then finalise results for the 2016 cost control valuations. 

Where necessary, schemes will then commence discussions with SABs on how to rectify any floor breaches that occur. In February 2021, the Government announced that any ceiling breaches that occur at the 2016 valuations will be waived, but that any floor breaches will be honoured.

Why is the Government making members pay for the cost of remedying the discrimination identified in the McCloud litigation?

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 (a ‘member cost’).  

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; the costs associated with this therefore fall into the ‘member cost’ category.   

As a ‘member cost’, this will be taken into account in the completion of the cost control element of the valuations process.