McCloud sees more public sector schemes breach cost-cap ceiling

The cost-control mechanism was introduced to ensure a fair balance of risks between scheme members and the taxpayer. It allows for a plus or minus 2 per cent corridor that, if breached at subsequent valuations, requires that action be taken to bring costs back within the target range.

The mechanism was paused following the McCloud judgment because of what the government actuary, Martin Clarke, called the “perverse results” it produced, which would have seen most schemes breach the cost-cap floor and therefore be compelled to increase member benefits.

Changes to mortality and other assumptions recognised at this 2016 valuation will continue to result in downward cost pressures at the 2020 valuation – if all else remains equal

GAD

HM Treasury unpaused the mechanism in October last year, but not before stipulating that the cost of implementing the McCloud remedy would be placed on schemes’ 2016 valuations, leading to significant protests from unions and public sector scheme members, who argued that the government was going back on previously agreed promises to improve benefits and/or cut contribution rates.

The decision to place the cost of the McCloud remedy on the 2016 valuations has been the subject of legal challenges, with multiple unions filing for judicial review.

GAD confirms bad news for members

The GAD released data for four public sector schemes in April, which showed three — the Fire Service Pension Schemes for England and for Wales, as well as the Police Pension Scheme — had breached the cost-cap ceiling as a result of McCloud costs. 

Now, a new round of data shows a further three schemes breaching the cost-control ceiling because of McCloud.

The Judicial Pension Scheme had a proposed employer cost cap set at 25.6 per cent of pay when the 2016 valuation process was paused.

Now that process has been completed, the cost-cap cost of the scheme — calculated by adding the employer contribution correction cost and the McCloud remedy cost together — stands at 29.5 per cent, 3.9 per cent above the cost cap and outside the plus/minus 2 per cent corridor.

The McCloud remedy accounted for 9 per cent of the cost-cap cost, leading to a breach of the ceiling.

The JPS breach was the most modest of the three schemes to suffer a breach, however. The Firefighters’ Pension Scheme (Scotland) had a cost-cap cost at 13.7 per cent above the employer cost cap — McCloud adding 18.9 per cent to the 10.6 per cent employer contribution correction cost.

A similar story played out for the Police Pension Scheme (Scotland), which exceeded its employer cost cap by 13.2 per cent, the McCloud remedy adding 18.1 per cent to an employer contribution correction cost of 7.4 per cent.

The results for a number of other schemes were released at the same time, but none of the others — including the Armed Forces Pension Scheme, the Teachers’ Pension Scheme (England and Wales), and the NHS Pension Scheme — breached the cost-cap ceiling. 

Not coincidentally, these were the schemes where the McCloud costs were lowest, with the 5 per cent figure in the AFPS being the highest of the three.

Though the government has waived the consequences of the breach, meaning members will not have to incur higher contribution rates or lower benefits as schemes bring costs back towards the target range, acrimony has arisen where the McCloud costs have cancelled out previous breaches of the cost-cap floor, which would otherwise have seen increased benefits and/or decreased contribution rates applied.

One sliver of good news is that GAD anticipates downward pressure on costs as a result of mortality changes.

“Changes to mortality and other assumptions recognised at this 2016 valuation will continue to result in downward cost pressures at the 2020 valuation — if all else remains equal,” it explained.