Explanatory Memorandum to Tynwald Members
Issued by the Public Sector Pensions Authority
To the Hon Stephen Rodan MLC, President of Tynwald and the Hon Council and
Keys in Tynwald assembled
1.
Title of measure
Isle of Man Government Unified Scheme (Amendment) Scheme 2017
2.
Changes in policy
There are no changes in policy.
3.
Effects of the measure
The purpose of the Amendment Scheme is to:
a) Reduce all future service benefits by 6% in sections 1 – 7 of the Unified Scheme
(GUS) from 1 April 2017; and
b) introduce a 2.5% increase in the contributions of new members under GUS from
1st April 2017 and all current members in sections 1 – 7 in 1% tranches from 1
April 2018.
4.
Reasons for the measure
At its sitting in June 2016, Tynwald:
a. Received the report of the Public Sector Pensions Authority entitled "Fairness and
Sustainability of Public Sector Pension Schemes - Revised Proposals;"
b. Endorsed the proposals for reform of the Government Unified Scheme (GUS) through
the adoption of a cost envelope approach as recommended by the PSPA’s Technical
Advisory Group;
c. Endorsed the continued process for negotiating reforms of the Teachers and Police
Schemes with a view to consulting on detailed scheme changes and thereafter,
preparing formal amendments to be laid before Tynwald for approval;
d. Endorsed the proposals for reform of the Tynwald Members Scheme;
e. Requested the PSPA to commence reform negotiations with members of the Judicial
Pension Scheme once the outcome of the UK judicial review is known;
f.
Requested the Public Sector Pensions Authority to consult on detailed scheme
changes with a view to formal amendments to all schemes being laid before Tynwald
for approval by no later than February 2017; and
g. Agreed that the options for managing the legacy position in the longer term will be
subject to further investigation by the PSPA and the Treasury in conjunction with
Tynwald Members and a further report will be submitted to Tynwald for
consideration after the General Election.
Scheme Design within new Cost Envelope
In respect of item (f) above, the PSPA has sought views from the relevant trade
unions on the methodology for progressing negotiations on scheme design within the
agreed cost envelope for the Government Unified Scheme (GUS).
At its meeting on 14th November 2016, the PSPA gave the trade unions until 30th
November 2016 to return with a scheme design proposal for consideration by the
PSPA which would meet the cost envelope saving under item (b) above as outlined in
June 2016 Tynwald. The following proposal was submitted jointly by the unions
involved in GUS, which was approved by the PSPA at its meeting on 7th December
2016:

For all members (excluding Tynwald Members): reduction in all future service
benefits by 6% which will achieve the saving of 1.8% of pensionable pay agreed
from the “Fairness and Sustainability” report;

Introduce a 2.5% increase in the contributions of all current and future new
members under GUS (excluding Tynwald Members, who have already had a 5%
increase in contributions from October 2016) to be staged over three years from
April 2018.
The trade unions and the PSPA believe that the reduction in future service benefits
of 6% is simple to implement, delivers the required savings immediately rather than
being reliant on other factors in order to achieve a saving (e.g. future longevity,
inflation etc), will be understood by the majority of GUS members and will not result
in unintended consequences such as a mass exodus of members from GUS, which
would lead to a sharp increase in expenditure and reduction in contributions.
With regard to the increase in contributions, many civil servants are still transitioning
to the full rate of contributions under GUS (at the rate of 1% per annum) following
implementation of the Scheme in April 2012. They will not reach the full rate of
contributions (7.5% or 9.75% depending upon GUS Section) until April 2018.
Therefore, the PSPA proposes to bring in the further 2.5% contribution increase from
April 2018, via transitioning of 1% per year over the following three years to April
2020. An undertaking was given on the inception of GUS that any future contribution
increases would be transitioned at no more than 1% per year and this is being
honoured.
The PSPA engaged upon a 4 week formal consultation on the proposal with affected
members, their trade unions, employers and Treasury, as required by the Public
Sector Pensions Act 2011, in order to meet the deadline of February 2017 for
presenting an amending Scheme to Tynwald for approval.
Similar discussions are taking place with the Police, Teachers and their
representatives on scheme design amendments to achieve similar savings under a
cost envelope approach and it is also hoped that these will be finalised in in the next
few months. The benefits and contributions for Tynwald Members have now been
reformed as previously agreed and Members have now been transferred to a new
section of GUS.
Consultation
Detailed information was provided on the PSPA website in the form of the draft
Scheme and a summary of the provisions.
Trade union and staff representatives were given advance notice of the consultation
and scheme members were consulted about the proposals by way of an “All Staff”
email pointing to further information and copies of the draft Scheme on the PSPA
website. Managers were additionally asked to bring the consultation to the attention
of colleagues without access to a computer. Relevant employing authorities, the
Treasury, staff representatives and trade unions were invited to comment. The
Consultation ran from 9 December 2016 to midday on 6 January 2017.
There were 61 individual responses to the consultation, one collective response from
the Isle of Man Fire and Rescue Service and a response from the Fire Brigades Union
(FBU). Many of the individual responses made more than one comment. The main
themes that emerged were: 15 strongly objected to the proposals, 12 were broadly
supportive, 10 GPs believed that the proposals would lead to recruitment and
retention problems for the NHS. 9 said they were considering opting out or believed
others would and 6 believed they should not be made to pay for government not
making sufficient provision for public sector pensions in the past. Having considered
the responses the PSPA did not believe that there were sufficient reasons not to
approve the legislation.
Post Consultation actions
Firstly, the PSPA will issue a post consultation feedback document which will be on
its website shortly.
Secondly, the PSPA also wish to emphasise that these reforms are a step to
achieving sustainable future public sector pension provision and that the next step
which will follow shortly is further legislation to clarify how Cost Sharing under the
Unified Scheme will work. Whilst considering the Isle of Man Government Unified
Scheme (Amendment) Scheme 2017 Honourable Members are requested to note the
a short Note, which is attached to this Memorandum. It explains how future Cost
Sharing will operate. It is anticipated that highlighting this next step will reassure
Honourable Members that this is not the final step in the reform of Public Sector
Pension Schemes, but rather that Schemes will be subject to regular review.
5.
Legal Powers or Legal Advice obtained
The PSPA has made this Scheme under Section 6(1)(c) of the Public Sector Pensions
Act 2011 which states:
“The PSPA must make schemes providing for the superannuation of public sector
employees, subject to the approval of Tynwald;”
Treasury noted that the Public Sector Pensions Authority is formally consulting on
reform proposals to the Government Unified Scheme (GUS) and approved the
Authority submitting the current proposals (in line with the Tynwald Motion of June
2016) to reduce the future service benefits for all GUS members (excluding Tynwald
Members) by 6% from April 2017 and to implement staged contribution increases of
2.5% from April 2018, for inclusion on the February 2017 Tynwald Order Paper.
Treasury further noted that if the proposals did not receive the approval of Tynwald
the PSPA will need to come back with a new/revised scheme.
6.
Resource implications
Legacy Funding Gap – update
5.1
When the cost envelope proposals were submitted to Tynwald for approval it was
decided not to debate the separate Cabinet Office report on “Addressing the Legacy
Funding Gap”. During discussions with Members in the lead up to June Tynwald, it
was clear that further research and discussions were necessary on some of the ideas
identified by Members. It was therefore decided to pick up this work again after the
General Election, and conduct further workshops with Members before submitting an
updated legacy funding report to Tynwald for debate.
5.2
It is important to note that the PSPA’s actuaries are about to undertake actuarial
valuations of all unfunded IoM public sector pension schemes as at 31 March 2016.
The work will involve an up to date assessment of each scheme’s liabilities, the
future cost of providing benefits and future projected cashflows (income and
expenditure) over a long period. The work will update the figures previously
produced in 2013 which were used as the basis for the sustainability and legacy
funding work undertaken by the PSPA, the Cabinet Office and Treasury earlier this
year.
5.3
The results of the valuation will not be available until the Spring of 2017 as in the
first instance, member data for all active, pensioner and preserved members has to
be provided to the PSPA and thereafter reviewed in detail for accuracy before being
passed to the actuaries for verification. Only then can they commence detailed
calculation work to value and project scheme benefits on a range of financial and
demographic assumptions.
5.4
Given that the PSPA and Treasury are still considering options for funding the legacy
position in line with the June 2016 Tynwald motion, it is recommended that up to
date actuarial figures and in particular, future cashflow projections are available,
before providing Tynwald Members with further options for funding the legacy
position.
5.5
However, in the interim period, Council should note that further work will be
undertaken by the PSPA and Treasury Officers for discussion in a future Members’
workshop.
7.
Tynwald procedure
This Scheme is required to be moved before Tynwald for approval under section
15(1) of the Public Sector Pensions Act 2011.
NOTE
Principles of Cost Sharing
Cost sharing (also known as “risk sharing”) is key to ensuring that the Government Unified
Scheme (GUS) remains sustainable in the long term. Explaining how risk sharing will work in
principle will increase confidence in the overall proposals for reform amongst key
stakeholders and scheme members. Therefore the key principles of cost sharing are
provided below.
Cost sharing is complicated and no set of principles can cover all the important points that
regulations will need to deal with. The PSPA is currently working with its actuaries to draft a
detailed cost sharing basis on which there will be a public consultation in the near future.
The principles set out below are based on how cost sharing might work in respect of Isle of
Man public sector pension arrangements, which is in many respects similar to how it
operates in the UK public sector pension schemes. It is important that the principles are
seen as an overall package for future sustainability which will be applied not only to GUS but
also to other public sector pension schemes. As such the final arrangements must be right
for the Isle of Man Schemes and therefore should not be overly reliant upon UK experience.
Principles for cost sharing
1. The key principle underpinning the proposals for reform of GUS was the adoption of the
concept of a "cost envelope". The "cost envelope" is based on the value of benefits accrued
by scheme members expressed as a percentage of their pensionable pay. The proposals for
reform of GUS established an agreed initial level of member contributions and benefits. Cost
sharing is intended to ensure that GUS remains sustainable in the future by adjusting
member contributions and/or benefits, subject to final legislation, where necessary to keep
the employer cost within an agreed range of the initial "cost envelope".
2. An employer cost cap will be necessary to protect taxpayers from significant increases in
the cost of providing benefits in the future. In the interests of fairness the cap will be
symmetrical so that any significant reductions in the cost of providing benefits in the future
that may arise can be shared with scheme members in the same way that any cost
increases will be shared.
3. The employer cost cap will normally be set following a full actuarial valuation of the
scheme and after discussions between the PSPA, its actuary and the Treasury.
4. Only changes to scheme costs arising from member experience or choices (e.g. assumed
longevity or amount of pension commuted or ill-health experience) will be controlled by the
cost cap. Changes arising from financial assumptions or other factors set or influenced by
the scheme manager or Government (e.g. the discount rate or inflation or methodology or
administration costs) will normally be outside this process. Regulations will specify in due
course the factors that will be included in the cost cap process.
5. As stated above, the start of the process will be a full actuarial valuation of the Scheme.
After subsequent actuarial valuations the actuary is expected to produce a report that
allocates changes in the estimated cost of future benefits to (a) factors included in the cost
cap process and (b) factors not included in the cost cap process.
6. If there are changes in Scheme costs, either any changes at all or only those which may
be in excess of a set percentage (which will be discussed as part finalising the cost sharing
regulations) arising from changes in factors included in the cost cap process, the PSPA will
formally consult with the trade unions and other parties on legislation to return the cost to
the original levels. This is likely to include either future contribution increases and/or future
benefit changes. If no agreement can be reached with the trade unions and other interested
parties, a default option will be determined which may be to adjust accrual rates for future
service to bring the estimated cost to the appropriate level.
7. The cost sharing process is intended to control the cost of GUS to taxpayers in the future
and to give all stakeholders confidence in the future sustainability of the Scheme. It is part
of an overall set of reforms that is believed to be fair and sustainable.
The PSPA therefore recommends that Government commits to operating a cost sharing
process for the long term (at least 25 years’) and that if this is adhered to, it is expected to
remove the need for further changes to member contributions or benefits other than in
respect of matters extrinsic to this agreed process, and then via parliamentary debate and
an affirmative motion from Tynwald, which mirrors the position in the UK.