Public Service Pensions Reform James Richardson, HM Treasury UNCLASSIFIED UNCLASSIFIED

Cost ceilings and the employer contribution cap Government has set out its proposals  Allows scheme specific discussions to progress, within specified cost limits Cost of scheme specific proposals cannot exceed cost ceilings, set by reference scheme Cost ceilings will be used during scheme specific negotiations, but will not play any ongoing role   2. Employer contribution cap This will be discussed in due course  It ensures public service pensions remain affordable and sustainable, in case costs within the new schemes increase Fixed cap to taxpayers’ contributions to schemes as a proportion of pensionable pay. Timing: To operate following the introduction of new schemes UNCLASSIFIED UNCLASSIFIED

Creation of a reference scheme Reference scheme has been set by Treasury, based on the recommendations of Lord Hutton’s Independent Public Service Pensions Commission. We have received advice from the Government Actuary’s Department on data assumptions and methodology. Reference scheme does not set the parameters within which scheme discussions should take place. It exists purely in order to determine the cost ceilings. Without prejudice to the Government’s final decisions on scheme design. UNCLASSIFIED UNCLASSIFIED

Reference scheme design The features of the reference scheme are consistent with those recommended by the Independent Public Service Pensions Commission: Career Average Revalued Earnings scheme (CARE) and earnings revaluation of past CARE service for active members Accrual rate to be determined centrally Normal pension age linked to state pension age (or to age 60 for active members of the firefighters’ scheme). Pensions in payment and in deferment indexed by CPI Average member contributions assumed to be 3.2 percentage points above current level No fixed lump sums Optional commutation, with a 12:1 factor for converting pension to lump sum (ie. for every £1 pension given up, member receives £12 as lump sum) Ancillary benefits (such as sickness, death and survivors’ benefits) match provision in schemes that are currently open to new members Members rejoining after a period of deferment less than 5 years can link new service with previous service Members transferring between public service schemes would be treated as having continuous active service. UNCLASSIFIED UNCLASSIFIED

Data methodology Membership data: We will be using member data from the most recent actuarial valuation, unless more up to date and robust membership data are available. Calculations will have an effective date of 1 April 2015. Methodology: Projected Unit Method (PUM). Standard actuarial methodology with one year control period. PUM measures the cost of accrual and avoids emphasis on any one category of membership. It is used in preparing the resource accounts of public service pension schemes. UNCLASSIFIED UNCLASSIFIED

Assumptions The following consistent assumptions will apply across schemes: Nominal discount rate – 5% pa Earnings increases – 4.25% pa CPI increases – 2% pa Improvements in post retirement life expectancy – ONS 2008 population projections Proportion of pension commuted in exchange for a lump sum – 75% of HMRC limit Age above Normal Pension Age - Scheme actuaries will be asked to propose assumptions for ages and career paths above the Normal Pension Age in the existing schemes. UNCLASSIFIED UNCLASSIFIED

Accrual rates Recognise the importance of accrual rates in these discussions. Government has asked scheme actuaries to prepare a full range of accrual rates, from 1/50ths to 1/80ths, to inform its decisions. UNCLASSIFIED UNCLASSIFIED

Transition and past service costs If proposals under discussion relate to past service (prior to 2015) incur costs, then these costs must be included within the cost ceilings. Net Present Value of past service cost increases should be spread over 5 year period. This is so they can be added to the costs of future accrual and expressed as a % of pensionable pay. Transition costs Scheme specific costs could include transitional arrangements, which could increase the cost of future accrual above the level of the cost ceilings in the short term. Where transitional arrangements are provided, the cost ceiling should be compared against the average cost of future accrual over a 5 year period. UNCLASSIFIED UNCLASSIFIED

What’s happening next? 22nd September – Further meeting with TUC. By end September – Government will announce its decision on cost ceilings for pensions schemes. We have asked GAD to prepare calculations on a full range of accrual rates – from 1/50ths to 1/80ths. End October – Government receives initial proposals from unions for reformed schemes. November/December – Further meeting between Government and TUC. End December – Final proposals for reformed schemes. UNCLASSIFIED UNCLASSIFIED