Workers enrolled in public sector defined benefit (DB) schemes could see their benefits change as early as next year, as some of these pension funds appear to have breached the cost cap.
The government published its quadrennial series of documents related to the valuation of public schemes yesterday (6 September), in which it hinted at the breaches.
In a letter to the Trades Union Congress, the chief secretary to the Treasury, Elizabeth Truss, said "the government encountered early indications are that there may be cost cap floor breaches in at least some of the schemes".
Implemented in 2015, the cap was introduced as a cost control mechanism to offer taxpayers and employees protection from unexpected changes in pension costs.
The level of the cap is set as a percentage of pensionable payroll, which varies from scheme to scheme.
However, if the cap is breached, costs may be rebalanced by amending scheme benefits for future accruals to alter the overall cost of the scheme.
This can lead to altering the level of employee contributions so that a higher or lower corresponding level of employer contributions is required.
The scheme valuation reports from the Government Actuary Department (GAD), which are expected later this year once the directions have been finalised, will confirm whether there has been a breach of the cap.
Due to these breaches, the Treasury will be asking the government actuary "to provide his professional opinion as to whether the mechanism has been implemented in a way that delivers the government’s original policy objectives," Ms Truss said.
There are currently more than 5 million active members in the public service pension schemes, which cover the NHS, teachers, the armed forces, the police, firefighters, local government workers, judiciary and civil servants.
Neil Walsh, pensions officer at union Prospect, told FTAdviser that the cost cap floor has been breached "because of public sector pay restraint and lower mortality improvements than expected".
He said: "These are factors that genuinely reduced the expected cost of benefits in these schemes. Under the cost cap mechanism it is likely that benefits in the relevant schemes will be improved in order to maintain the expected cost within the agreed range.
"The cost cap mechanism is there to protect scheme members and taxpayers and it is wrong for Treasury to review it simply because it produced an answer it does not like. Any fundamental change to the cost cap could breach the commitment given that there would be no further reforms of these schemes for at least 25 years."
David Robbins, senior consultant at Willis Towers Watson, explained that government and unions will have to agree on any changes.
He said: "If they can’t agree, the default position is that employees will build up pensions representing a smaller fractional of their pay."
The government is also proposing to change the discount rate used to assess the current cost of future payments from the unfunded schemes, which will increase the bill for public sector employers.