Government launches consultation on public sector pension contributions

The Treasury has launched a consultation on the discount rate used to set unfunded public sector pension contributions.

The government announced in November’s Comprehensive Spending Review that it would consult on this issue, in response to a recommendation in the interim report of the Independent Public Service Pensions Commission. The Commission expressed an initial view that the current discount rate is at the high end of what is appropriate.

The consultation document sets out the impacts of a lower discount rate; the objectives against which different approaches to setting the discount rate can be evaluated; and the four options for a new approach to setting the discount rate identified by the Commission. It is seeking views on whether there are any additional impacts not identified, the objectives, the approach to setting the discount rate and the actual discount rate which should be chosen.

The consultation is calling on public sector unions, representatives of public sector pension scheme members, and commentators on pensions and social policy. The consultation will be open from 9 December 2010 to 3 March 2011.

John Prior, head of the public sector outsourcing team at Punter Southall, said: “The review that is now being carried out by Treasury seems fairly likely to result in the discount rate being reduced by at least 0.5% per annum.

“Such a reduction would increase the assessed cost of public sector pensions by around 3% of pay, although this would be mitigated to some extent by the recent change to CPI pension increases and the planned increase in employee contributions.

“Public sector pensions are effectively a government-backed promise of future payments, so they are similar to index-linked gilts. This would suggest a much greater reduction of the discount rate – to a rate of around 1% pa above inflation – is appropriate.”

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