Public Service Pensions: Cost Control Mechanism and the Reformed Scheme Only Design

The Government have today published a policy statement on the cost control mechanism (CCM) in public service pensions titled “Public Service Pensions—the Cost Control Mechanism and the Reformed Scheme Only Design”.

Following recommendations from the Independent Public Service Pensions Commission (IPSPC) in 2011, the CCM was introduced into the valuation process for the reformed public service pension schemes in the Public Service Pensions Act 2013 following consultation with member representatives. It was designed to ensure a fair balance of risk regarding the cost of providing defined-benefit (DB) public service pensions between members and the taxpayer. If, when the CCM is tested, scheme costs have increased or decreased by more than a specified percentage of pensionable pay compared to a target cost, then member benefits—and/or member contributions—in the relevant scheme are adjusted to bring costs back to target.

Following a review by the Government Actuary and a full public consultation process, the Government confirmed in October 2021 that it would implement three reforms to the CCM in time for the 2020 valuations:

Reformed scheme only design;

Wider 3% cost corridor; and

Economic check.

The policy statement published today provides further details on how the reformed scheme only design will operate from the 2020 valuations onwards, in particular with regard to those pension scheme members in scope of the remedy for the McCloud litigation.

“Reformed schemes” in this context mean the public service pension schemes introduced as part of reforms following the IPSPC review, from 2015 for most public service pension schemes and from 2014 for the local government pension scheme for England and Wales. The reformed scheme only design means that the CCM will only consider past and future service in the reformed schemes, with legacy scheme costs excluded from the mechanism. This will lead to a more stable CCM and ensure consistency between the set of benefits being assessed and the set of benefits potentially being adjusted, thereby ensuring fairness for both taxpayers and scheme members.

However, pension scheme members of most schemes in scope of the McCloud remedy will have a choice between benefits in respect of their service from 1 April 2015 and 31 March 2022 to be calculated on the basis of the reformed scheme or the previous, legacy public service pension scheme. The policy statement confirms that all service on or before 31 March 2015—31 March 2014 for the local government pension scheme in England and Wales—will be excluded from the CCM as this service is exclusively in the legacy schemes. All service from 1 April 2022 onwards will be included in the CCM, as this service will be exclusively in the reformed schemes. In particular, the statement provides details of how service during the McCloud remedy period—1 April 2015 to 31 March 2022 for most schemes—will be treated under the reformed scheme only design and concludes that McCloud remedy costs will not have a material impact on the CCM from the 2020 valuations onwards.