Recommendations & Conclusions
10 items
2
Recommendation
Sixth Report - Public Sector Pensions
Accepted
It is becoming clear that public service pension policy is affecting the delivery of frontline services in some areas, such as education and health. In 2019–20, a substantial increase in employers’ pension contributions—which was not fully funded by HM Treasury—has directly impacted on employer budgets. As a result of concerns …
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It is becoming clear that public service pension policy is affecting the delivery of frontline services in some areas, such as education and health. In 2019–20, a substantial increase in employers’ pension contributions—which was not fully funded by HM Treasury—has directly impacted on employer budgets. As a result of concerns about these increasing contributions, around 200 independent schools are set to withdraw from the Teachers’ Pension Scheme, and we are concerned more may follow. This may put further pressure on the remaining schools, who may not be able to withdraw from the scheme despite others in the sector viewing it as increasingly unaffordable. At least one higher education institution has had to make redundancies in response to the 2019–20 increase in costs. The employer contribution rate is due to be implemented in 2024, where it may change again. Both the SCAPE rate—which is used to help set the employer contribution rate and drove the 2019–20 increase in employer contributions—and its methodology will be reviewed prior to 2024. There is also evidence that pensions can affect staff choices about their work, which impacts frontline services. For example, the interaction between the NHS Pension Scheme rules and the tax system means a large number of doctors have reduced their working hours, opted out of the scheme, or retired early. Recommendation: HM Treasury should regularly set out the likely impact on employers’ budgets of employer contribution rate changes in advance of their implementation. By giving employers plenty of notice and offering wider support, it can help minimising the impact on frontline services. HM Treasury should also consult widely on the SCAPE discount rate and its methodology, well in advance of any changes.
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Government response AI summary
The government agreed with the recommendation, stating it already provides advance notice and support, and confirmed it is consulting on the SCAPE discount rate methodology with a new rate to be set for April 2024, proposing to align future reviews with the valuation cycle.
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HM Treasury
3
Recommendation
Sixth Report - Public Sector Pensions
Accepted
HM Treasury has not done enough to ensure people understand the value of their pensions. This Committee previously recommended, in 2011, that HM Treasury should work with employers and pension schemes to ensure that clear and relevant information is provided to employees on the value of their pensions. But limited …
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HM Treasury has not done enough to ensure people understand the value of their pensions. This Committee previously recommended, in 2011, that HM Treasury should work with employers and pension schemes to ensure that clear and relevant information is provided to employees on the value of their pensions. But limited progress has been made and more needs to be done to improve employees’ 6 Public Sector Pensions understanding. The problem has been exacerbated with further complexities being introduced as a result of government’s response to the McCloud judgment. HM Treasury provided us with data that implies that over 238,000 employees have opted out of their pensions, but it does not have a clear understanding of why they do so and whether some groups are more likely to opt out – it is particularly concerning if younger and lower paid employees are more likely to opt out. There are understandable reasons why people may choose to opt out of pension schemes for example, owing to short-term spending priorities, but inadequate pensions are likely to cause issues in the future and push costs into other policy areas, such as if people are more likely to be reliant on the benefits system. Recommendation: HM Treasury should lead from the centre, and seek to understand members’ views regarding their pensions, including the reasons why people may opt out of a scheme and whether this has a long-term impact on other parts of public services and expenditure. It should undertake a review into the take- up and retention of public pensions, particularly amongst young professionals, to help understand the issues employers face when trying to demonstrate the value of pensions. Such a review should identify areas where communication is working well and recommend best practice for employers.
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Government response AI summary
The government accepted the recommendation, stating it will commission departments to analyse latest participation data, work to standardise data collection, and request updates on measures to improve participation to inform efforts to promote pension value, with a target date of March 2022.
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HM Treasury
5
Recommendation
Sixth Report - Public Sector Pensions
Accepted
HM Treasury has had to revisit key elements of the reforms, and these issues may take decades to resolve fully. HM Treasury should have foreseen the age discrimination issue that gave rise to the 2018 McCloud judgment, and putting things right will take many decades to resolve. HM Treasury wants …
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HM Treasury has had to revisit key elements of the reforms, and these issues may take decades to resolve fully. HM Treasury should have foreseen the age discrimination issue that gave rise to the 2018 McCloud judgment, and putting things right will take many decades to resolve. HM Treasury wants members to pay to put this right—at an estimated cost of £17 billion—despite this being its own mistake. Separately, HM Treasury is concerned that the cost control mechanism—designed to share costs of pensions fairly between employees and employers—is not sufficiently protecting the taxpayer and members. The Government Actuary’s Department says Public Sector Pensions 7 that the cost control mechanism is likely to be triggered very frequently, rather than only as a result of ‘extraordinary, unpredictable events’ as HM Treasury intended. This undermines the usefulness and stability of the mechanism and will impact employees and employers alike. HM Treasury was advised at the time of the reforms of both the age discrimination problem and that the cost control mechanism could easily be triggered. Recommendation: HM Treasury must prioritise work to quickly resolve the challenges presented by the McCloud judgment and cost control mechanism, in order to give certainty to scheme members and employers, and rebuild the trust lost through these issues. The Department should write to us with an update in six months’ time.
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Government response AI summary
The government accepted the recommendation, outlining current legislative actions for the McCloud judgment via a new Bill and detailing steps to address the cost control mechanism, including waiving 2016 valuation ceiling breaches and consulting on future changes. It also committed to providing an update in …
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HM Treasury
8
Conclusion
Sixth Report - Public Sector Pensions
Accepted
HM Treasury has since been developing a remedy for those affected.14 In February 2021, HM Treasury announced that it plans to give the 3 million members affected by the McCloud judgment a choice of which scheme they would like their service between April 2015 and March 2022 to count towards. …
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HM Treasury has since been developing a remedy for those affected.14 In February 2021, HM Treasury announced that it plans to give the 3 million members affected by the McCloud judgment a choice of which scheme they would like their service between April 2015 and March 2022 to count towards. The affected members will make this choice at the time their pension becomes payable, which means putting things right will take decades to resolve fully.15 HM Treasury estimates the cost of the remedy to be around £17 billion (excluding the cost of the additional administration). HM Treasury told us that it is ultimately members who will pay these costs, and this process will be managed through the cost control mechanism (see below).16 HM Treasury said it was now working 8 Qq 2, 3; C&AG’s Report, para 4, 5 9 Qq 2, 3 10 Qq 19–22 11 HM Treasury (Catherine Little) letter to the Committee, 12 May 2021 12 Qq 64–67; C&AG’s Report, para 3.2 13 C&AG’s Report, para 16 14 Qq 64, 67–72 15 Qq 67, 83 16 Qq 71, 72 10 Public Sector Pensions very closely with schemes to understand what the administration of the McCloud remedy is likely to cost, and it will consider how best to support schemes in the next spending review.17
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Government response AI summary
The government affirmed its commitment to legislate to remedy the McCloud judgment discrimination and noted that the Public Service Pensions and Judicial Offices Bill was introduced in July 2021, reiterating the ongoing actions described by the committee.
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HM Treasury
9
Conclusion
Sixth Report - Public Sector Pensions
Accepted
Separately, HM Treasury has some concerns about the measures it has in place to control rising costs. As a part of its 2011–2015 reforms, government put in place a ‘cost control mechanism’ designed to share costs fairly between employees and employers.18 The mechanism is built into the four-yearly pension valuation …
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Separately, HM Treasury has some concerns about the measures it has in place to control rising costs. As a part of its 2011–2015 reforms, government put in place a ‘cost control mechanism’ designed to share costs fairly between employees and employers.18 The mechanism is built into the four-yearly pension valuation process, and its purpose is to control costs for taxpayer, to maintain value of pensions for scheme members’, and to achieve stability. If certain costs rise, members may see an increase in their contribution rate or a fall in the rate at which their benefits build up. Similarly, if certain costs fall, members may see a reduction in the amount they contribute, or an increase in their future benefits.19
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Government response AI summary
The government detailed actions being taken to address issues with the cost control mechanism, including publishing amending Directions for 2016 valuations, waiving ceiling breaches, delivering floor breaches, and initiating discussions with Scheme Advisory Boards to rectify these.
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HM Treasury
10
Recommendation
Sixth Report - Public Sector Pensions
Accepted
While the cost control mechanism was only used for the first time in 2016, HM Treasury is concerned that it is not sufficiently protecting the taxpayer and members. The provisional results of the 2016 valuations show that costs had fallen across all schemes, and therefore members could expect an increase …
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While the cost control mechanism was only used for the first time in 2016, HM Treasury is concerned that it is not sufficiently protecting the taxpayer and members. The provisional results of the 2016 valuations show that costs had fallen across all schemes, and therefore members could expect an increase in their benefits or a reduction in the amount they contribute.20 However, HM Treasury paused the implementation of those changes while it formed its response to the McCloud judgment. HM Treasury has asked the Government Actuary’s Department (GAD) to review the mechanism to ensure it meets government’s objectives. When asked for current reflections from the review, GAD told us that the mechanism is likely to be triggered “very frequently”, rather than only as a result of ‘extraordinary, unpredictable events’ as HM Treasury intended. In his view, this undermines the stability of the mechanism and appears not to be keeping taxpayer costs under control.21
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Government response AI summary
The government is addressing the cost control mechanism flaws by waiving ceiling breaches from 2016 valuations, delivering floor breaches, and has launched a consultation on changes to be implemented before the 2020 valuations.
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HM Treasury
19
Recommendation
Sixth Report - Public Sector Pensions
Accepted
This Committee previously recommended, in 2011, that HM Treasury should work with employers and pension schemes to ensure that clear and relevant information is provided to employees on the value of their pensions, and that this information is regularly updated and its usefulness to staff assessed.41 Despite this, we have …
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This Committee previously recommended, in 2011, that HM Treasury should work with employers and pension schemes to ensure that clear and relevant information is provided to employees on the value of their pensions, and that this information is regularly updated and its usefulness to staff assessed.41 Despite this, we have seen little evidence of progress in ensuring that people understand the value of their pensions: HM Treasury told us it recognises that more needs to be done.42 HM Treasury agreed that part of the problem lies in education, and making sure that people understand how pensions work generally. Recent initiatives may help. For example, the Ministry of Defence has considered introducing more specific information on pay slips about the employee and employer contributions to better communicate their value to the scheme members.43
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Government response AI summary
The government accepts the recommendation, agreeing to commission departments for participation data analysis, standardise data collection, and request updates on measures to promote the value of public service pensions to employees by March 2022.
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HM Treasury
20
Conclusion
Sixth Report - Public Sector Pensions
Accepted
Furthermore, government’s response to the McCloud judgment has potential to exacerbate the problem. Members affected by the McCloud remedy will be asked to make a complex decision about their pensions, which may include balancing between the level of pension they retire with and when they wish to retire. HM Treasury …
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Furthermore, government’s response to the McCloud judgment has potential to exacerbate the problem. Members affected by the McCloud remedy will be asked to make a complex decision about their pensions, which may include balancing between the level of pension they retire with and when they wish to retire. HM Treasury told us that from 2024 it plans to require all schemes to include additional information as part of their annual benefit statement. This will show the equivalent information for the legacy schemes as well as the reformed schemes so that, throughout the remaining period of an individual’s career, they can see how the two schemes change on an annual basis.44
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Government response AI summary
The government outlined the 'deferred choice underpin' introduced in the Bill, allowing members to make choices about their benefits at retirement to simplify the complex decision-making related to the McCloud judgment.
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HM Treasury
21
Recommendation
Sixth Report - Public Sector Pensions
Accepted
When asked about what information was available on employees that opt out of public service pension schemes, HM Treasury told us it did not collect this information.45 HM Treasury told us that individual pension schemes often provided assessments of opt-out rates to public pay review boards, but detailed breakdown were …
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When asked about what information was available on employees that opt out of public service pension schemes, HM Treasury told us it did not collect this information.45 HM Treasury told us that individual pension schemes often provided assessments of opt-out rates to public pay review boards, but detailed breakdown were not always available.46 For example, the Teachers’ Pension Schemes only provides an estimate of overall participation. HM Treasury provided us with some data on overall opt-out rates: • NHS Pension Scheme – 10% of employees opted out of their pension, the equivalent of around 180,000 employees. • Teachers’ Pension Scheme – 7% to 8% of employees opted out of their pension, the equivalent of around 53,000 to 61,000 employees. • Civil Service Pension Scheme – less than 1% of employees opted out of their pension, the equivalent of around 5,000 employees.47 40 Qq 85–88 41 HC Committee of Public Accounts, The impact of the 2007–08 changes to public service pensions, Thirty-eighth Report of Session 2010–2012, HC 833, May 2011. 42 Qq 3, 16, 20, 25, 32 43 Q 47 44 Q 83 45 Q 30 46 Qq 42–46 47 Q 43 14 Public Sector Pensions
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Government response AI summary
The government accepted the recommendation, stating it will commission departments for analysis of participation data, work to standardise data collection including by member characteristics, and request updates on measures to improve participation, aiming for implementation by March 2022.
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HM Treasury
22
Recommendation
Sixth Report - Public Sector Pensions
Accepted
Individual schemes hold information on participation rates for some groups, for example participation in the NHS Pension Scheme is lower among younger employees.48 However, HM Treasury told us that there are lots of imperfections in the quality of participation data, and that it does not as standard collect detailed opt-out …
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Individual schemes hold information on participation rates for some groups, for example participation in the NHS Pension Scheme is lower among younger employees.48 However, HM Treasury told us that there are lots of imperfections in the quality of participation data, and that it does not as standard collect detailed opt-out rates..49 As a result, HM Treasury could not give us a clear answer as to whether overall younger employees and those on lower pay are more likely to opt out of their pensions than other groups, or whether participation rates are increasing or decreasing over time.50 HM Treasury told us that while anecdotally it was aware of this issue, the data was limited – it was not clear on why people choose to opt out of their pensions or which groups are more likely to.51 HM Treasury also told us it does not collect any data on what happens to people once they opt out of their pension scheme.52 There are understandable reasons why people may choose to opt out of pension schemes (for example, short-term spending priorities) but inadequate pensions are likely to cause issues in the future and push costs into other policy areas, for example if people are more likely to be reliant on the benefits system.53 Inequalities and differences between groups
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Government response AI summary
The government accepts the recommendation, committing to commission departments for detailed participation data analysis, standardise data collection by member characteristics, and gather updates on measures to improve participation by March 2022.
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HM Treasury