There will be no changes to the discount rate methodology for unfunded public service pensions, the government has said in response to a consultation on this approach. It finds the current method, using expected long-term GDP growth, best meets the objectives of reflecting the cost to employers, risks to government income and supporting stability. 

 

While funded schemes typically use gilts plus a margin to discount future liabilities, actuarial valuations of unfunded public sector schemes such as those for teachers, police or the NHS have been using expected long-term GDP growth rates since 2011. 

 

In 2021, the government consulted on this method and has responded on Thursday. It said the discount rate “should have three objectives: to ensure employer contributions fairly reflect costs of providing these pensions, to reflect future risks to government income, and to support stability”. 

 

The response said that “the current methodology based on expected long-term GDP growth best meets the balance of these objectives”.  

 

This methodology, it added, “will best provide intergenerational fairness by ensuring that pension promises are made in a way that is sustainable and affordable to future taxpayers, which will support the long-term stability of the public service pension system”. 

 

The GDP discount methodology is not universally accepted as a reliable way to assess pension liabilities in the public sector. 

Some have also queried if the decision to stick with the current discount methodology pushes public and private sector schemes further apart. 

Keeping the valuation of public service pensions means that the cost of a public service pension is going up at a time when pension costs for other schemes have fallen significantly, noted Steve Simkins, public services lead at consulting firm Isio. 

"It begs the question – how long can the two very different public and private sector regimes survive alongside each other?" Simkins said.

 

He said choosing an approach based on the Office for Budget Responsibility's long-term economic growth was “finger in the air”, creating unnecessary uncertainty for pension schemes designed to span generations. 

 

"Government departments, schools and NHS trusts may take some comfort that spending budgets will be adjusted to compensate for very significant pension cost increases, but this will need to be seen to be believed," he added.

 

Unfunded public sector schemes were reformed so that from 2015, members accrue career average rather than final salary benefits, while the minimum retirement age was increased. 

 

Is expected GDP a good discount rate methodology?