Participating employers of the Principal Civil Service Pension Scheme will face an increase in their pension costs, due to a reduced discount rate, following government efforts to control public spending.
From April 1 2015 these employers will pay an average contribution rate of 21.1 per cent of members’ pensionable pay, according to the scheme’s 2012 valuation report.
These employers are going to see another 2 per cent increase in 2016 because of the cessation of contracting out
Steve Simkins, KPMG
This level will be higher or lower according to members' salaries. The level is up from an average 18.9 per cent contribution rate, set after the scheme’s 2007 valuation.
In 2011 the Treasury reduced the discount rate net of pension increases to 3 per cent from 3.5 per cent.
This was partially offset by factors including an increase in member contributions and a change in the demographic assumptions, according to the report.
The scheme, which has notional assets of £127.3bn, had a £5.5bn shortfall in its notional assets at March 31 2012, down from a £1.1bn surplus in 2007.
The employer cost cap has been set at 18.5 per cent of pensionable pay. The cap – which wasconsultedon in March – will be introduced from April 1 next year in order to control future public spending on pensions and will have a margin of plus or minus 2 percentage points.
If costs fall below or above the cap, scheme benefits may be amended for future accruals to alter the overall cost of the scheme, or the level of member contributions may be altered.
Mark Packham, pensions director at consultancy PwC, said increased contributions will have a material impact on employer’s payroll costs.
“We’re looking at organisations here where the cost of employment is a very substantial part of the operation,” said Packham.
The Treasury confirmed departments will not receive any additional funding via their budget to account for the increased pension contributions.
The scheme will switch to calculating benefits on a career average revalued earnings basis from April next year and will also allow third-party contractors to participate.
The reforms follow wider recommendations made by Lord Hutton for a more sustainable public sector pension system.
Steve Simkins, head of public sector pensions at consultancy KPMG, said the increased costs are "very material" for employers where most of the workforce participates in the scheme.
“You should remember also that these employers are going to see another 2 per cent increase in 2016 because of the cessation of contracting out,” he said.
He added that in certain parts of the public sector – such as further education colleges and quasi-autonomous non-governmental organisations – there is a move towards employers offering defined contribution schemes to benefit from cost reductions and increased flexibility for members.
