One of the Board’s statutory duties, under the regulations, is to introduce and maintain a process to manage costs in the scheme alongside the process introduced by HM Treasury for all public service schemes. These two processes, the public service pension schemes employer cost cap and SAB cost management are delivered in line with the document “Public service pensions: actuarial valuations and the employer cost cap mechanism” (pdf 347kb).
A useful background to the two processes and progress to date can be found in the document House of Commons Briefing Paper February 2019 (PDF 866kb)
This section of the site will contain information on, as well as the outcome of, those processes.
Latest on cost management in the LGPS
The Government Actuary's Department has now completed the scheme cost assessment required under Regulation 116 of the LGPS Regulations 2013. The SAB cost management process final report was completed using methodology and 10 assumptions determined by the Board, following discussion at the Cost Management, Benefit Design and Administration (CMBDA) Committee. Scheme costs were assessed as being 20.5 percent of pensionable pay, 1 percent above the 19.5 percent target cost. This is within the range where the Board may make recommendations to amend benefits to bring scheme costs back towards the target cost but is not obliged to. Following a discussion, the Board agreed not to recommend any changes in its letter to the Secretary of State about the outcome of the scheme cost assessment.
At a special meeting in 1st July the Board considered the paused 2016 scheme valuation, HMT cost control mechanism and its own cost management process, in particular the status, and the method for the inclusion, of McCloud costs in that process. The agreement reached by the Board and the subsequent letter to MHCLG (as it was then) were subject to the final publication of HMT Directions not diverging from assumptions used in reaching the outcome. Now that HMT Directions have been published the outcome of the SAB 2016 cost management process can similarly be made public.
As set out in the 18th August 2021 letter to the then minister Luke Hall MP the Board agreed to spread McCloud costs over a 10 year period (rather than the 4 used by HMT) resulting in an outcome of 19.4% against a target cost of 19.5%.
Despite the slight shortfall in cost the Board agreed not to recommend any scheme changes, in particular citing the unwelcome impact of having to backdate any changes to April 2019 would have on already hard pressed administration teams. However the Board has set out its determination to revisit third tier ill health and contributions for the lowest paid members with the view to making recommendations in these areas separately to the cost management process.
Finally the Board expressed its concern around the method used to include McCloud costs in the HMT cost control mechanism
On 7th October The Public Service Pensions (Valuations and Employer Cost Cap) (Amendment) Directions 2021 were published by HM Treasury. These Amending Directions allow schemes to conclude their 2016 valuations by setting out how they must carry out the cost control element of those valuations.
HM Treasury has published the outcome to the Public service pensions: cost control mechanism consultation which closed on 19th August 2021. The response confirms that the mechanism will, from the 2020 scheme valuation, move to a reformed scheme only design with a 3% corridor and will introduce an economic check.
Although not directly addressing the concerns of the LGPS the response does acknowledge them and commits to discussing with stakeholders appropriate ways to introduce these changes, how the E&W SAB cost management process can be adapted and how the principle of that process could be extended to the Scotland and NI schemes.
The Board has today submitted a response to HMT consultation on the cost control mechanism (PDF 7 pages 185kb). The response was complied by the secretariat with input from the Cost Management, Benefit Design and Administration (CMBDA) committee.
A Written Ministerial Statement has been laid today, announcing the publication of two consultations. The first is about proposed reforms to the cost control mechanism (CCM), following the publication of the Government Actuary’s review of the mechanism. There are 3 proposed changes to the existing mechanism, the 1st would change the mechanism to operating only in the reformed schemes; the 2nd would widen the “corridor” from the existing 2% margin to 3%; and the 3rd would introduce an additional “economic check” when there is a breach of the mechanism to ensure that broader economic conditions are considered before any breach is implemented. On page 16 of the consultation document, HM Treasury notes that further consideration will need to be given to the detailed implementation of the “reformed scheme only design” in the LGPS, given the effects of the underpin. The second consultation is about the discount rate used in valuations of unfunded public service pension schemes and potential changes to the SCAPE methodology used. The primary use of the SCAPE discount rate is to determine the level of employer contribution rates in the unfunded public service pension schemes, but it is also used in the production of actuarial factors in the LGPS. Both consultations run for 8 weeks, closing on August 19th 2021.
A Written Ministerial Statement has been laid today, announcing the publication of the Government Actuary’s final report on his review of the cost control mechanism. The WMS states that HM Treasury will respond to the report in due course. The report has 56 pages in total, including 4 appendices. There are 5 separate recommendations on potential changes to the mechanism – which applies across all public service pension schemes. Paragraph 1.17 of the report confirms that the review did not consider the separate cost control mechanism for the LGPS which is operated by the Scheme Advisory Board. The report acknowledges that the differences between the LGPS and the unfunded schemes mean that some of the recommendations, if adopted, may need revising to accommodate those differences.
On Thursday 16th July HM Treasury published an update on the employer cost cap process. alongside a consultation on proposals to rectify McCloud age discrimination in the unfunded pension schemes. A consultation by MHLG for the LGPS was also published later the same day.
The employer cost cap process, applicable to all public service pension schemes including the LGPS is currently paused but will now be restarted. The objective would be to complete the process by next year, taking into account the cost of the proposals to remedy age discrimination as set out in the McCloud consultations.
The SAB cost cap process is also currently paused. Given this announcement the Board will consider its position now that the proposals to rectify age discrimination for the LGPS are available.
The Chief Secretary to the Treasury announced in a written statement that ‘the government believes that the difference in treatment will need to be remedied across all those schemes. This includes schemes for the NHS, civil service, local government, teachers, police, armed forces, judiciary and fire and rescue workers. Continuing to resist the full implications of the judgment in Court would only add to the uncertainty experienced by members’
The full statement can be found on the parliament web site
The SAB has published an advice note covering the implications of McCloud/Cost Cap in relation to the 2019 fund valuations:
Minister response letter regarding the pause of the SAB cost management process:
Letter from Minister regarding pause of SAB cost management process (pdf 42kb)
On 14th February the SAB published a Q&A on the McCloud case and it's potential impact on cost cap for administering authorities. Please see the link below:
The McCloud case Q&A for administering authorities page (opens in new window)
The above page will be updated as and when new information becomes available
On 7th February the SAB received confirmation that the cost cap pause and the uncertainty caused by the McCloud case announced in last week’s Written Ministerial Statement (see 30th January 2019 WMS on cost cap below) applies equally to the LGPS as to the unfunded public service pension schemes. Given that confirmation the SAB considers it has no option but to pause its own cost management process pending the outcome of McCloud.
As a result there are currently no changes to benefits planned in respect of the cost cap. This situation will be reviewed once McCloud is resolved which is not expected for some months.
Letter confirming application of WMS to LGPS (pdf 121kb)
Letter from SAB pausing the cost management process (PDF 78kb)
On 30th January the Government announced a pause in the cost cap process due to uncertainty caused by a court ruling on elements of the 2014/15 scheme reforms. The Written Ministerial Statement setting out the reason for the pause is listed below, together with a summary of and the the full Court of Appeal ruling in the case of The Lord Chancellor and Secretary of State for Justice and another v McCloud and Mostyn and others [2018] and Sargeant v London Fire and Emergency Planning Authority and others [2018]. Also listed is a letter from MHCLG confirming that the WMS applies equally to the LGPS as to the unfunded public service schemes.
The Shadow Scheme Advisory Board (SSAB) has today published two briefing notes in respect of the cost control processes which will be used to assess the costs of the reformed LGPS in England & Wales.
A briefing note for members and employers has been published in order to:
- give a broad overview of the background to the cost control processes,
- outline the differences between the cost control processes and local funding valuations, and
- detail the possible impacts on the benefits structure and/ or employee contribution rates which could arise from the results of the cost control processes.
The SSAB ask that administering authorities make this briefing note accessible to fund employers and members so that they can familiarise themselves with the processes and the possible impacts that the cost control mechanisms could have on the Scheme benefits structure and/ or employee contribution rates.
A second briefing note has been prepared for administering authorities in order to outline the role that LGPS pension funds will play in the cost control process and in particular focusses on the practicalities of delivering accurate and timely cost control figures.
In addition, the SSAB has published a process map (located here) and a timetable (located here) setting out its plans for the interactions between the HM Treasury Employer Cost Cap (ECC) process and the Scheme Advisory Board Future Service Cost (FSC) process.
Any questions or queries arising from the publication of these documents should be referred to the Board secretariat in the first instance.
