The discount rate used to set unfunded public service pension contributions

This consultation focuses on the discount rate used to set contribution rates for the unfunded public service pension schemes.

The Government announced at the Spending Review that it would consult on this issue, in response to a recommendation in the interim report of the Independent Public Service Pensions Commission. The Commission expressed an initial view that the current discount rate is at the high end of what is appropriate.

The consultation document sets out the impacts of a lower discount rate; the objectives against which different approaches to setting the discount rate can be evaluated; and the four options for a new approach to setting the discount rate identified by the Commission.  It seeks views on whether there are any additional impacts not identified, the objectives, the approach to setting the discount rate and the actual discount rate which should be chosen.

We would like to hear from public service unions, independent providers of public services (including private sector businesses and non-profit making organisations), representatives of public service pension scheme members, representative bodies for independent providers, academics, commentators on pensions and social policy, those individuals who consider that they may be affected by a change in the discount rate and any other interested parties.

The Government launched this consultation in response to a recommendation in the interim report of the Independent Public Service Pensions Commission. The consultation closed on 3 March 2011. A number of roundtable stakeholder events were held and all responses were carefully considered before next steps were determined. The Government is very grateful for respondents’ contributions to the consultation process.

The Government announced at Budget that the appropriate discount rate for calculating unfunded public service pension contribution rates should be based on the long term expectations of Gross Domestic Product (GDP) growth. This will ensure that employment decisions made today take into account the costs passed to future taxpayers on a fair and sustainable basis. A discount rate of 3 per cent above CPI will therefore be adopted under this methodology for future valuations.