The SCAPE rate and deciding when to take govt DB

michaels

Inside the (deliberately) obscure govt 'shadow' finances the 'SCAPE' rate is a construct based on an estimate of the long term growth rate of the real economy. The govt assumes that money notionally set aside for public sector pensions will grow at this rate.

Recently the OBR decided that this rate rather than being an average of 1.7% over the next 50 years, should actually be 2%.

For internal govt accounting purposes this reduces the notional amount that departments need to set aside to pay future pensions, thus allowing them to spend more of their budgets on day to day 'delivery'. In terms of money out the door, because public sector pensions are unfunded they is no actual difference.

However this higher 'expected' growth rate of 'invested assets' has implications for early (or late) retirement for civil service pensioners - retirement at state pension age and pensions are the same, but take your pension early and because it has had less time to grow at 2% (rather than at 1.7%), you face a larger deduction - delay past 67 and you get a larger increase. Google suggests the value of deferring each year would be a real return of about 8.15% at age 55, falling to 1.95% at age 65 under the 1.7% SCAPE growth rate that should have been in place for the last 3 years (decline is due to longevity risk). Under the revised Scape with a 2% growth rate assumption this increases to 10.45% falling to 3.6%.

TLDR, new SCAPE makes taking a civil service DB early much more costly and so potentially changes the call on when to stop using a DC bridge and when to draw your DB….

flaneurs_lobster

Isn't SCAPE CPI + 2.0%?

Don't think announcing the increase and publishing it at the House of Commons Library makes it "deliberately obscure" or part of "shadow finances".

Linton

As I understand it, the Civil Service does not “set aside” money for future pension payments in any real sense. CS pensions are simply paid out as they fall due like all government expenditure. Where do you think the CS puts its set aside money?

I have never heard of SCAPE but it sounds like an accounting method for long term economic planning. It could, I guess, change the number of civil servants the government employs in the future.

In any case the terms of your CS pension are fixed by your contract of employment. Pensions that you have already accrued cannot be reduced. What effect do you think SCAPE would have on bridging the gap between when you choose to stop working and your contractual retirement age when your pension becomes payable?

mrklaw

any ERF should be in your contract - are they not fixed for that tranche of scheme (I know they may introduce new schemes with different rules)

so this is just an internal measure for internal accounting - doesn’t make any difference to how much they pay out to you

hugheskevi

However this higher 'expected' growth rate of 'invested assets' has implications for early (or late) retirement for civil service pensioners - retirement at state pension age and pensions are the same, but take your pension early and because it has had less time to grow at 2% (rather than at 1.7%), you face a larger deduction - delay past 67 and you get a larger increase. Google suggests the value of deferring each year would be a real return of about 8.15% at age 55, falling to 1.95% at age 65 under the 1.7% SCAPE growth rate that should have been in place for the last 3 years (decline is due to longevity risk). Under the revised Scape with a 2% growth rate assumption this increases to 10.45% falling to 3.6%.

The impact of factor changes on early-retirement factors is quite limited. For example, when the discount rate changed from CPI+2.4% to CPI+1.7% the alpha early retirement factor applied to retire at age 60 for someone with a Normal Pension age of 67 changed from a 31.3% reduction to a 30% reduction. The latest change is from CPI+1.7% to CPI+2.0%, so that reduction will probably increase from the current 30% reduction to about 30.5%.

I have never heard of SCAPE but it sounds like an accounting method for long term economic planning. It could, I guess, change the number of civil servants the government employs in the future.

The idea is to make Departments take full account of the financial implications of employing staff, rather than focusing only on pay levels and ignoring pensions as the pension liabilities don't fall due for many years.

In practice, if the cost of pensions changes in a cliff-edge way as is the case with a discount rate, the financial settlement at the next Spending Review is likely to take this into account. Ultimately it is all just money washing around the Exchequer that balances to zero - the Treasury grants Departments funds, who then make employer pension contributions back to the Exchequer.

In any case the terms of your CS pension are fixed by your contract of employment. Pensions that you have already accrued cannot be reduced. What effect do you think SCAPE would have on bridging the gap between when you choose to stop working and your contractual retirement age when your pension becomes payable?

any ERF should be in your contract - are they not fixed for that tranche of scheme (I know they may introduce new schemes with different rules)

so this is just an internal measure for internal accounting - doesn’t make any difference to how much they pay out to you

The terms of the pension say the Scheme Manager will set actuarial rates with reference to advice from the Scheme Actuary. So many factors change over time.

The discount rate has a much stronger effect on the purchase of Added Pension and EPA, the cost of these has varied very significantly over time, but most members are unaware of this and, because the rates are set 'actuarially', simply accept whatever the current rate is as being appropriate with no further consideration.

I'm curious, what would be the advantage to the taxpayer of an hypothecated fund such as the LGPS scheme?

The theory is to pretend there is a fund so that employers act appropriately both in the short and longer term. Hence there is a big game going on with actuaries calculating notional funds, notional rates, and notional deficits that affect the employer contribution rate over 15 year adjustment periods. Page 22 of the Valuation report shows this. In the early days when this approach was introduced around 2012 from memory, reporting was erratic, now it is standardised with scheme Valuations.

It is arguable how useful it is. If the discount rate falls significantly a very large notional deficit is produced, requiring big hikes to the employer contribution rate. It is unlikely Govt. will just shrug shoulders at that point and say the NHS needs to close some hospitals to meet the shortfall, and instead the NHS settlement at the next Spending Review is likely to increase to cover the higher cost of employment. So in practice it is often just something HM Treasury can use to squeeze Departmental settlements when it wants to.

It can also be a helpful way to claim a big headline increase in spending in an area, then claw it back via higher employer pension contributions.

Linton

https://forums.moneysavingexpert.com/discussion/comment/82150907#Comment_82150907

Yes, unfunded means that CS pensions are paid out in the same way as CS pay.

All pension inflation linking must be guaranteed by the government through the direct or (usually) indirect use of index linked gilts. No-one else can provide that absolute guarantee. So whether putting in 2 extra layers (pension scheme and investment management) of administration is worthwhile may be a factor.

Secret2ndAccount

https://forums.moneysavingexpert.com/discussion/comment/82150850#Comment_82150850

The pension at normal retirement date is contractual. Early retirment factors are set by the scheme actuaries and can change from time to time. This is true of Civil Service, LGPS, my company DB, and many, many others.

SnowMan

The public sector schemes do review early retirement factors (and other factors) regularly to ensure a cost neutrality between the pension being paid early compared to it being paid at NRD. And the SCAPE discount rate does factor into this.

The calculations involve assumptions for the discount rate to use and increasing the discount rate will make pension payments in the distant future less valuable, with that affect being more than for earlier pension payments. So that reduces the value of £1 of normal retirement pension by more than it reduces the cost of £1 of early retirement pension. So the reduction for early retirement might in a particular case increase from 30% to 32% (again completely made up figures). Other assumptions such as earnings inflation will affect the factors for those retiring from active rather than deferred service.

Whether there are assets backing the pension scheme does not affect that this neutrality calculation is required.

In terms of funding of the PCSPS it would make no sense for them to buy assets to create a fund to cover pension payments, like a private sector defined benefit scheme would. For example if the government buys gilts to 'cover' its PCSPS liabilities, it is simply issuing debt to itself so it can save its own money which is totally circular.

Public sector pensions are paid by the government creating money to spend and making those payments. Taxation is something that comes afterwards to take back some of that created money and redistribute wealth. If a new country set up on a desert island with its own currency where would the money come from to pay the initial taxation if the country hadn't yet spent anything?

As to the original question, it's hard to gauge how balanced the early retirement factors are either before or after the change. Whether it is better to a) use other assets to fund the period up to NRA and then take the normal retirement pension or b) take the early retirement pension, in relation to purely a best value criteria is difficult to assess.

I would approach it more from the perspective of how much secure income do you need? If using other assets now and waiting to NRD gives you a higher level of secure income that you are happier with, then go for that.

Other things such as taxation, cashflow and longevity need to be factored in also. If you come from a family who always live past 100 then that skews things towards taking the normal retirement pension.

SnowMan

https://forums.moneysavingexpert.com/discussion/comment/82151064#Comment_82151064

Creation of money

The government is the monopoly issuer of currency which they do when spending, so they are a creator of base money. But the banks create most of the wider money supply by creating bank deposits.

The banks make this deposit money simply by making loans. They then make an electronic accounting entry showing the loan as an asset and create a matching deposit out of thin air when they pay the loan into the borrowers account. If the borrower then spends that money with a trader of goods who banks elsewhere then the central bank reserves of the lending bank go down and the central bank reserves of the trader of goods go up. But the aggregate amount of central bank reserves in the system stays the same.

Unfunded schemes

It's only the word 'lend' that I'd prefer not to use, as the government don't need a loan from us as they can just create base money for anything they want to spend on. If they spend recklessly in a way that the resources of the country can't handle the danger is the creation of inflation but there is no danger of the government running out of money to pay their obligations.

I think I would phrase it that public sector employees are making payments to the government which offset the amount of base money that the government has to create to spend, in the same way as tax. And in return the public sector employee get the payments of pension at a later date from the government as a result of the government's contractual obligation to them.

When the pension freedoms came in there was a restriction applied to stop those in unfunded public sector schemes transferring them elsewhere. Had they not done that that a civil servant might have transferred their pension to a DC pension with a private pension provider. The government would then have needed to create base money (the transfer value) out of nowhere. The DC scheme in spending those transfers to buy assets (the seller on the other side of the transaction would have new money in their bank account as a result of this chain of events), would push more spending power into the private economy. That spending power of all those combined transfer values might exceed the resources of the economy, and inflation would result.

SnowMan

https://forums.moneysavingexpert.com/discussion/comment/82151233#Comment_82151233

I can only vaguely remember it coming in and should really have said I was giving a reason why a ban on transfers out is reasonable. The reason actually given seems to have been as follows.

https://researchbriefings.files.parliament.uk/documents/CBP-8382/CBP-8382.pdf

3.1 Pay as you go schemes
The Government decided to legislate to prevent members of unfunded public service schemes transferring their pension rights to a DC scheme, except in very limited circumstances. This was because of concerns about costs being brought forward if more public servants requested the transfer value of their pension rights:

5.6 Initial government estimates suggest that the net cost of 1% of public service workers transferring out of public service schemes each year would be £200 million. This burden would be borne by the Exchequer, which would need to fund the additional costs by placing the burden onto taxpayers or onto current scheme members by imposing higher contributions. The government believes that continuing to allow people to transfer from a public service defined benefit scheme to a defined contribution scheme to take advantage of the new system would therefore be unfair on both the taxpayer and remaining scheme members.

michaels

The TLDR is that the govt have changed the rules making drawing a civil service pension taken early pay out less than before the change and that this may impact on a decision to take a dB early or use a DC to bridge.