A key part of the agreement to reform public sector pensions for both Government and Unions was the introduction of a cost sharing mechanism. The purpose of the mechanism was to keep the schemes sustainable by limiting the cost to the taxpayer. A valuation of the public sector schemes takes place every four years and if the cost is outside of the pre-agreed cost envelope, then changes would need to be made to the scheme to bring it back to an acceptable level. The Government wanted a ceiling on the relative cost of public sector pensions, which unions agreed to as long as it was introduced with a cost floor – this led to the cost envelope. The legislation outlines an agreed process that begins if the costs of a public sector pension scheme change by more or less than 2% from the agreed benchmark in a valuation.
The initial results of the 2016 valuations were that the costs of the schemes breached the cost cap mechanism floor due to lower than expected increases in salaries and life expectancy. This triggered a process in the Scheme Advisory Boards (SABs) to reach agreement on changes to the schemes that bring them back into line with the benchmark.