NIPSA Responds to HMT Consultation on Public Service Pension Contributions Discount Rate
01/03/2011
Consultation on the Discount Rate Used to Set Unfunded Public Service Pension Contributions
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NIPSA Response to the
“Consultation on the Discount Rate used to set unfunded
Public Service Pension Contributions”
1. NIPSA, the Northern Ireland Public Service Alliance, represents over 45,000 members across all areas of the public sector in Northern Ireland, including staff in the National Health Service, NI Civil Service and Local Government functions.
2. At the consultative event held by HM Treasury in Belfast on 22 February 2011 Officials advised that the review of the discount rate was purely a technical exercise which of itself had no implications for the levels of contributions that would be levied on employees. It was explained however that the setting of a lower discount rate could result in increased overall contributions from employers and employees although any increases to employer rates would be funded by central government allocations to public bodies which in turn would repay the higher contributions back to central government.
3. While paragraph 1.2 of the consultative document states that “the split in respect of how these contributions are shared between employers and employees is a question of pension scheme design that is beyond the scope of this consultation”. NIPSA is clear that the objective of the review is to create the conditions for justification of further increased employee contribution rates. The review of the discount rate does in our view “drive a coach and horses” through the existing “cap and share” arrangements that have been agreed between the trade unions and employers/government in the range of non funded public service pension schemes.
4. Paragraph 1.31 of the HM Treasury consultative document refers to the level of employer contribution rates in unfunded public service pension schemes as “a key barrier to greater plurality of public service provision, potentially reducing efficiencies and innovation in public service delivery from independent providers”. This reference relates directly to the Fair Deal policy review which is being taken forward separately by the Westminster Government. This reference, in itself, undermines any portrayal of the consultation on the discount rate as a purely technical exercise and highlights the clear political objective of government to make it easier for private and voluntary sector organisations to compete for the delivery of public services.
5. Nonetheless if the case for any even playing field for both public and private sector competition for public service work is accepted as reasonable it is not clear how overall increased or decreased contribution rates will make it easier for private sector bids for public sector work. It would seem that provided the pension costs for private sector bidders reflect the cost of public sector pensions, the impact would be neutral. However the current government is planning to dilute the current Fair Deal arrangements to facilitate the further liberalisation of the public sector and any increases in public sector contribution rates combined with a withdrawal of the obligation on the private sector organisations to provide comparable pensions to those enjoyed by staff in the transferred/transferring functions can only be regarded as contributing to the creation of a non level playing field favouring the private sector at the expense of the public sector.
6. At the consultative event in Belfast on 22 February HM Treasury Officials were questioned about the equality impact assessments of the outworkings of the review. They were reminded that the Northern Ireland equality legislation in particular Section 75 of the NI Act 1998 placed particular responsibilities on the government to assess the potential negative impacts on a range of groups in society. There is a need for an initial Equality Impact Assessment prior to or at least at the earliest stages of the consultation. This approach has not been adopted and NIPSA would have serious concerns about the absence of a full equality impact assessment on this issue.
7. Notwithstanding the HM Treasury view that this exercise has no implications for the contribution rates for employees, any additional pressure on employee contribution rates will inevitably drive lower paid public servants out of their occupational pension schemes as wages and salaries are frozen and restricted and price inflation increases with a disproportionate negative impact on low and middle income earners. A recent GMB union survey on this issue demonstrates this to be the probable outworkings of any increased employee contribution rates. This view is shared by the Local Government Association as set out in the letter of 16 February from Baroness Eaton to the Chancellor of the Exchequer.
8. In addition to the above NIPSA would emphasise the following points:-
(a) Any change to the discount rate would have no bearing on the actual liabilities and amount of money paid out by government to members of unfunded public service pension schemes.
(b) The Hutton Report (Interim) stated that the current discount rate was at the high end of what was appropriate confirms implicitly that the current discount rate is within an acceptable range and there is no necessity for change.
(c) The cap and share arrangements must be factored into the consideration of the discount rate and care should be taken not to undermine the joint approach by employers and trade unions to address affordability.
(d) The Pensions Policy Institute views that the affordability and sustainability of public sector pensions is a matter relating to the government’s view on the importance of providing public sector pensions.
(e) The switch to the CPI measure from the RPI will reduce the cost of public service pensions, anywhere from 15 to 25%.
(f) Recent government estimates that the liabilities have been on an upward trend do not equate to any real underlying cost increase of public sector pensions to the taxpayer. In fact the 2007/08 changes and post 2010 election decisions have significantly reduced the projected liabilities.
9. It is against this background that consideration needs to be given the specific questions posted by the HM Treasury consultative exercise.
Question 1: Are there any other impacts arising from a change in the discount rate?
10. A reduction in the discount rate will increase political pressure for further increases in employee contribution rates. This will have broader impacts which would include making membership of a public service pension scheme less attractive especially to low and middle income employees, driving employees out of these schemes or reducing the potential membership and as a consequence increasing the number of public sector employees who will be dependent on state benefits in their retirement.
Question 2: Are there other objectives that should be taken into account by government in setting the SCAPE discount rate?
11. At face value the objectives laid down at section 3 of the consultative document appear to be reasonable. However we would not regard “support for a plurality of provision of public services” as a legitimate objective. It represents an attempt to set discount rates in a way which favours the opening up of public service provision to the market. This should not be a factor in the review of discount rates.
12. The ability to attract and retain highly motivated and skilled personnel to the public service must be factored into the consideration of the discount rate. Public sector pensions are regarded by staff as an integral part of the overall remuneration package and discount rates should be set with a view to retaining the support of the public sector workforce for what it regards as a fair and equitable remuneration system which includes pension provision.
Question 3: What are the advantages and disadvantages of the four options indentified by the Commission for the approach to setting the SCAPE discount rate?
13. NIPSA favours the retention of the present method ie the Social Time Preference Rate (STPR) provided the various elements of it are justifiable. There is an onus on the government to justify any move from the current utilisation and structure of the STPR. Consultees are asked to justify the use of the current rate. Instead the government should explain in detail its rationale for departing from the existing arrangements. No evidence has been produced by the government.
Question 4: Are there further approaches to setting the SCAPE discount rate that the Government could consider? If so, what are their advantage and disadvantages?
14. As detailed at paragraphs 13 and 16 of this submission NIPSA does not favour a move away from the STPR and believes that stability of approach is essential to a sustainable long term approach to pension funding. The government should have identified any options that it considers viable rather than bottom trawling for options.
Question 5: Which approach to setting the SCAPE discount rate do you recommend, and why? Following your preferred approach, what actual discount rate do you consider would be appropriate?
15. NIPSA in this submission has set out its views in respect of the case for the status quo in respect of the methodology for determining the discount rate. In doing so, the case has also been made to maintain the current discount rate, to do otherwise would cause irrevocable damage to both scheme sustainability and participation rates.
Question 6: Regular Review of SCAPE Discount Rate
16. In respect of the question of creating a mechanism for regular review of the SCAPE discount rate, we do not believe that regular reviews of the discount rate would contribute to the need for stability in the level of benefits and costs. The long term nature of pension liabilities and costs require a long term approach which provides employees and employers with an assurance that pensions of public servants are not subjected to potential political objectives and ultimately interference.
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