The Treasury has revealed the framework it will use to cap the costs of public service pension schemes.
The cap, recommended by Lord John Hutton’s independent public service pensions review, only relates to member costs. It is designed to limit the cost to the taxpayer of providing pensions to public sector workers. The level of the cap will be set as a percentage of pensionable payroll. In the Local Government Pension Scheme, which is funded, the cap will be triggered if the cost of pensions exceeds 19.5 per cent of pensionable payroll. For the rest of the public sector, where pensions are not funded, the level of the cap has not yet been confirmed but will be set on a scheme-by-scheme basis.
If a future valuation shows the costs have risen more than 2 percentage points above the cap, or fallen 2 percentage points below the cap, action will be taken to return costs to the level of the cap. This could include changes to contributions or accrual rates. If agreement cannot be reached within a defined period on actions to take to reduce public sector pension costs, a default adjustment will be made.
The Treasury estimates the shortfall between contributions and pensions in payment is currently £1bn a year across the teachers’, civil service and NHS schemes.
Treasury chief secretary Danny Alexander says: “It is only possible to ensure public service workers continue to have among the best pensions available if we also control the costs in the long term.”
Hargreaves Lansdown head of corporate research Laith Khalaf says: “Public sector pensions are still fundamentally very generous and in the long-term a future Government may need to revisit these reforms.”