Why was the cost control element of the 2016 valuations paused?
The cost control element of the 2016 valuations was not completed prior to the pause, as a result of the McCloud and Sargeant judgments.
The mechanism was paused at this time as the uncertainty arising from the McCloud and Sargeant judgments made it impossible to properly assess the value of member benefits at the 2016 valuation process.
While provisional results prior to the pause showed that a number of schemes would breach their cost control floors, these were never finalised and did not take into account the increased value in members’ benefits as a result of McCloud remedy.
If the cost control mechanism had not been paused, schemes may have adjusted benefits based on incorrect assumptions about benefit entitlements. The Government Actuary agreed that the policy of pausing the mechanism was reasonable.
Why is it necessary for remedy costs to be allowed for at valuations at all?
Schemes are required to complete valuations by statute.
Given this requirement, it is appropriate that these are completed based on an accurate assessment of the value of schemes to members, which necessarily includes remedy.
Failing to capture the value of remedy could mean that members’ benefits are changed based on an incomplete and inaccurate assessment of the value of these pension schemes.
This would represent a risk to the taxpayer, would introduce volatility into the mechanism at future valuations, and would fundamentally undermine the stated purpose of the mechanism to fairly assess the value of schemes to members in a way that is consistent and transparent.
Will the 2016 valuations be impacted by any of the planned reforms to the cost control mechanism?
The 2016 valuations are not affected by the proposed reforms.
These 2016 valuations have been completed in line with the original design of the cost control mechanism.
The proposed reforms to the cost control mechanism follow the Government Actuary’s review of the mechanism and a full HM Treasury consultation process which NI stakeholders participated in. HM Treasury asked the Government Actuary to review the mechanism in 2018 following the provisional results of the 2016 valuation, which raised concerns that the mechanism was too volatile, and was failing to operate in line with the intention that it should only be triggered by “unpredictable and extraordinary” events.
The 2016 valuation process had already begun before the review was commissioned. The 2016 process was paused due to the uncertainty which arose from the McCloud judgment, and the Government Actuary’s review was also put on hold at this time. Once HM Treasury announced that the 2016 process would resume, it also confirmed that the review would proceed. However, as it was not clear what the outcome of the review would be, it would not have been appropriate to take a decision on whether or how the mechanism should be reformed for the 2016 valuations.
The reforms to the cost control mechanism will be implemented in time for the 2020 valuations.
Why has it been decided to waive ceiling breaches?
In September 2018, HM Treasury announced it would commission the Government Actuary to undertake a review of the cost control mechanism amidst concerns it was not operating in line with its objectives. Specifically, there was concern about the stability of the mechanism, since breaches were only expected to be triggered by extraordinary, unpredictable events.
HM Treasury decided that it would be inappropriate to reduce member benefits based on a mechanism that may not be working as intended.
The PSPJOA 2022 therefore contains a measure to ensure no member benefits will be cut as a result of the 2016 valuations. The NI Assembly agreed a legislative consent motion that this should also apply to devolved schemes in NI.
What impact does the announcements on waiving ceiling breaches have on members?
As a result of the decision to waive any ceiling breaches, no member will see a reduction in pension benefits at the 2016 valuations. However, any floor breaches will be honoured, and any benefit increases that are due will be delivered.
The Department of Finance published amending directions in November 2021 which will allow schemes to complete the cost control element of the 2016 valuations and specifies how this should be done. Outcomes for individual schemes will not be known until results have been finalised.