Govt retains current public service pensions discount rate methodology

The government has decided against making any modifications to the current methodology used to set the Scape discount rate, which is used in the valuation of unfunded public service pension schemes to set employer contribution rates.

Following an industry consultation, the government identified three objectives that the discount rate should meet: to ensure employer contributions fairly reflect costs of providing these pensions, to reflect future risks to government income, and to support stability.

The government concluded that the current methodology based on expected long-term GDP growth best meets the balance of these objectives, also suggesting that this methodology will best provide intergenerational fairness by ensuring that pension promises are made in a way that is sustainable and affordable to future taxpayers.

The government therefore confirmed that it does not intend to make any modifications to this methodology.

However, the government acknowledged that its chosen methodology performs less well against the ‘stability’ objective, confirming that it will therefore consider ways in which the ‘stability’ objective might be better met whilst retaining the current methodology.

Going forward, the government confirmed that it will also aim to review the level of the discount rate once per valuation cycle rather than every five years, suggesting that this change will result in fewer reviews of the discount rate in practice and provide greater certainty to employers.

HM Treasury also provided a specific update in relation to approach to the 2020 valuations, noting that valuations as at 31 March 2020 are currently underway and will result in new employer contribution rates which will be implemented from April 2024.

As part of the valuation cycle, the government therefore aimed to publish the updated Scape rate alongside the consultation response, having also considered the latest long-term GDP projections from the Office for Budget Responsibility (OBR) in order to ensure that the discount rate reflects the most recent assumptions.

However, the government confirmed that it will look to ensure that departmental budgets set at Spending Review 2021 will not come under undue pressure because of a change in the contribution rates resulting from the updated Scape discount rate.

It also confirmed that, for employers whose employment costs are centrally funded by departments, HM Treasury will exceptionally provide funding for any increases in employer contribution rates resulting from the 2020 valuations as a consequence of changes to the Scape discount rate.

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