Pensions - Articles - Consultation on the discount rate methodology

 “We welcome today’s consultation on the SCAPE discount rate methodology as it affects one of the most important assumptions used to determine how much employers should pay into the unfunded public sector pension schemes. The consultation, and its focus on stability, is not surprising after the significant increases in employer contribution rates to these schemes after the last round of valuations at 2016.

 “The Government’s desire for stability will aid budgeting for employers whose staff participate in these schemes and, as was the case in 2019/20, avoid HM Treasury having to provide last-minute additional funding to cover any future increases.

 “We would question, however, whether the best approach to achieving stability is through the discount rate. The discount rate should represent a realistic estimate of the future and, as such, it will fluctuate over time as the wider economic and social environment changes. It should not be artificially adjusted to provide a stable result. Instead, it would be preferable for the valuation to provide a true, realistic cost of pension provision for the schemes. Thereafter, through modern risk-based valuation methods, a stability overlay can be applied to help smooth out contribution rates whilst ensuring inter-generational fairness.”