Policy background Public service pensions reform and the Court of Appeal’s judgment Cost control mechanism
The cost control mechanism is a mechanism designed to ensure a fair balance of risk with regard to the cost of providing public service defined benefit (DB) pension schemes between members of those schemes and the Exchequer (and by extension taxpayers). If, when the mechanism is tested, those costs have increased or decreased by more than a specified percentage of pensionable pay compared to the employer cost cap, then member benefits (and/or member contributions) in the relevant scheme are adjusted to bring the cost of that scheme back to target. The target cost is currently the same as the employer cost cap. So, there is effectively a corridor either side of the target cost, with a margin representing the ‘ceiling’ and ‘floor’. If costs fall below the lower margin (a "floor breach"), then benefits must be increased to bring costs back to target. If costs increase above the upper margin (a "ceiling breach"), then benefits must be reduced.
	The first test of the mechanism was at the 2016 valuations. Provisional 2016 cost control results indicated a breach of the cost cap floor in all schemes for which results were assessed. In the context of these provisional results, the government announced that it was asking the Government Actuary to review the cost control mechanism. The government was concerned that the cost control mechanism was too volatile and might not be operating in line with its original objectives; in particular, the intention that benefit rectification would only be triggered by ‘extraordinary, unpredictable events’.
	The cost control element of the 2016 valuations was paused due to the uncertainty arising over the value of member benefits following the judgments in the McCloud and Sargeant litigation, and with it so was the Government Actuary’s review of the mechanism. On 16 July 2020, alongside the publication of the Government’s consultation on addressing the discrimination identified in the McCloud and Sargeant judgments, the Government announced that the pause of the cost control element of the 2016 valuations process would be lifted and the Government Actuary’s review would proceed. In addition, the Government announced that the costs associated with addressing the discrimination would be considered when completing the cost control element of the 2016 valuations.
	Since the government was concerned that the mechanism may not be working as intended, it decided that there should be no benefit reductions for members of any schemes at the 2016 valuations. HM Treasury published amending directions in October 2021 which will allow schemes to complete the cost control element of the 2016 valuations and specifies how this should be done. 6 The Act contains provisions to ensure that any ceiling breaches that occur at the 2016 valuations (or 2017 valuations for the Local Government Pension Scheme (Scotland)) are not rectified. So the Act ensures that no member benefits will be cut as a result of the 2016 valuations.
	Furthermore, the Government Actuary has concluded his review of the mechanism, and his final report was published on 15 June 2021 which contained several recommendations on how to improve the mechanism. 7 The Government consulted on three of those recommendations and published its response in October 2021. 8 All three proposals consulted on are being taken forward, all of which were recommendations by the Government Actuary. They are: (i) reformed scheme only design; (ii) wider cost corridor; and (iii) an economic check.
	All three changes will be implemented in time for the 2020 valuations and are expected to make the cost control mechanism more stable, as was made clear in the Government Actuary’s review of the mechanism. A more stable mechanism means changes to member benefits or contributions become less likely. The proposed reforms thus help provide greater certainty regarding members’ projected retirement incomes and level of contributions.
	The Act includes measures which implement the framework for two of these reforms: the reformed scheme only design and the economic check.