Public sector employers could face additional pension costs of more than £8bn a year after the Government set the discount rate for pension contributions at 3 per cent above CPI.
The Budget document says the discount rate will be based on the long-term expectation of GDP growth to ensure employment decisions made today take into account the costs passed to future taxpayers on a “fair and sustainable basis”. The previous discount rate was RPI plus 3.5 per cent.
RPI inflation is currently 5.5 per cent, while CPI inflation is 4.4 per cent, meaning that at current prices the new discount rate is 1.1 per cent lower than the previous measure. The Treasury estimates that a 0.5 per cent decrease in the discount rate will increase costs by £3bn to £4bn.
Hargreaves Lansdown pensions analyst Laith Khalaf says: “This will increase contributions by billions of pounds. The Treasury estimates that a 0.5 per cent decrease in the discount rate will increase contributions by £3bn to £4bn, and this decrease is greater than that.
“The Budget document also says that Government will not allow contributions for members to rise in excess than has already been announced, which means the extra cost will fall on public sector employers.”
The Government proposes to review the discount rate every 5 years, and the methodology every 10 years.
The Budget has also confirms that employee pension contributions to unfunded public sector pension schemes will increase 3 per cent.