Defined Benefit  

Public sector employers face 13% pension bill hike

Public sector employers face 13% pension bill hike

The pensions bill for public sector employers is expected to increase up to 13 per cent next year, due to lower growth in the economy.

In September, the government announced it would be changing the discount rate used to calculate the liabilities of public sector schemes.

After a cut from 3 to 2.8 per cent in the 2016 Budget, HM Treasury proposed to reduce the discount rate to 2.4 per cent "to reflect the Office for Budget Responsibility’s long-term growth forecasts".

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In a letter to HM Treasury out on Friday (November 23) Martin Clarke, government actuary, said the initial valuation results had indicated total employer contribution rates will be increased by between 5 and 13 per cent of pensionable pay, with the amounts varying by scheme across this range.

These rates will be paid from 1 April 2019 to 31 March 2023, and the government's actuary department will calculate the employer contribution for each scheme as part of its valuations.

Sir Steve Webb, director of policy at Royal London and former pensions minister, has previously explained that public sector schemes calculated their liabilities in a different way to private schemes – future liabilities are discounted by an estimate of the growth in the economy.

He had said: "Because the bulk of public sector pension costs are funded by taxpayers, the affordability of such schemes into the future depends on the strength of the economy. 

"Since the government now expects the economy to grow more slowly, the burden of paying for future pension promises has increased."

There are currently more than 5 million active members in public service pension schemes, which cover the NHS, teachers, the armed forces, the police, firefighters, local government workers, judiciary and civil servants.

The Treasury will be supporting departments with any unforeseen costs for 2019/20, Elizabeth Truss, chief secretary to the Treasury, had said in September.

Beyond 2019/20, the extra money public sector employers will need will come from the budgets set in the forthcoming spending review.

FTAdviser reported last week that the Local Government Pension Scheme (LGPS) has temporarily suspended pension transfers has a consequence of the change to the discount rate.