Cost Sharing

The PSPA manages and administers the unfunded public sector pension schemes (the "pension schemes") in the Isle of Man, including the Government Unified, Police, Teachers and Judicial pension schemes. As part of the ongoing programme of ensuring that the pension schemes remain sustainable into the future, the PSPA has established a cost sharing mechanism for the Unified and Teachers Schemes and is currently working to establish cost sharing for the Police and Judicial Schemes. Cost Sharing is way of assessing every 6 years how the costs of a scheme have changed over that period of time. If certain costs have increased (or decreased), the cost sharing mechanism will then allow those cost increases (or decreases) to be shared between scheme members and the Employer.

Defined benefit pension schemes like those in the Isle of Man public service are very expensive to provide. Over the last 20 or so years they have become even more expensive as benefits relating to pay have increased, contributions have not kept pace with benefit increases and people are on average now living longer. It is good news that most of us will now live longer and more healthy lives, but compared with say 30 years ago, pensions in retirement are now paid for more than twice the length of time that they had been before. If you think about it, payment of a pension for twice the period it was expected means that the cost of providing that pension has roughly doubled.

In the private sector, this significant cost increase along with increased regulatory provisions (some of which also applies to Isle of Man defined benefit pensions) has meant that most defined benefit schemes have now closed to both current and future new employees and alternative Defined Contribution schemes are now the norm. This is not the case in the UK or Isle of Man public sector where defined benefit scheme are still provided to the majority of employees.

Government now pays over £80 million in total every year to support public sector pensions in the island and this is projected to increase in the future, albeit at a slower rate due to recent reforms across all schemes. This compares with roughly £20 million per year paid by scheme members in pension contributions. Therefore you can see that Government still pays by far the lions' share of public sector pension costs.

In order to be able to continue to provide high quality public sector pensions, there needs to be a way of sharing future cost changes between Government, its Employers and the Scheme Members. This does not mean that you will be expected to meet some or more of the £80 million annual pension costs, but rather that if certain aspects of these costs increase (n the future, there will be a new way of those cost changes being shared with you and Government and its Employers.

Similarly, if the recent reforms made to schemes does mean that pension costs in the future fall, then there will also be a way of sharing those cost reductions between government, its Employers and you as scheme members. So cost sharing will work both ways, in sharing cost increases as well as cost savings.

Therefore, the future sustainability of public sector pensions is improved by putting in place a long term plan to identify and then manage future cost changes to our pension schemes. Any cost changes will be identified and action taken at regular intervals (every 6 years) to address them in a way that has not previously been in place. In the future, both pension scheme members and Government will share the responsibility of ensuring the ongoing sustainability of schemes. By having such a cost sharing mechanism in place it is hoped that high quality defined benefit pension schemes will continue to be offered to public servants in the future.

There has always been provision in the Government Unified Scheme rules for cost sharing to be applied but there was no detail as to how this would work in practise. In June 2020 the PSPA put the required detail around how this will work via legislation which was approved by Tynwald in June 2020 and this has now been applied to both the Unified and Teachers pension schemes in the Isle of Man. Similar provisions will also be rolled out to the smaller Police and Judicial schemes in the near future.

It is also worth noting that the UK also has a recently introduced a cost sharing mechanism for all of its public sector pension schemes.

If you are a contributing member of the Government Unified, Police, Teachers or Judicial pension schemes then cost sharing will apply to you under these schemes once a formal cost sharing valuation has been undertaken.

The first formal cost sharing valuations will not be undertaken until April 2022 and the results will not be available until into 2023. At this time, the Cost Sharing regulations mandate for the PSPA to have formal discussions with your trade union representatives to decide on the best course of action and legislate for these outcomes. Therefore, it is anticipated that any changes to future pension accrual or contribution rates that come out of these discussions, will not be implemented until April 2024. Therefore there is plenty of time for the PSPA and your trade union representatives to explain how this will work and what it might mean for you in practice. Therefore there is no reason for you to make any rash decisions about your future membership of a pension scheme given any changes that may result from cost sharing are still over 3 years away.

The PSPA will work with its actuaries to assess on a regular basis (every 6 years – further details are provided later in this document) how the costs of pensions have changed. If costs have, or are projected to, increase or decrease above a small “buffer” (equivalent to 0.5% of pensionable pay), then these increases or decreases will be shared between scheme members and Government/Employers. The effect on scheme members will either be that:

• For a cost increase, future benefits would be reduced or contributions increased to recoup the cost increase;
• For a cost reduction, future benefits would be increased or contributions decreased to recoup the cost saving;
• Benefits earned to date will not be affected as the PSPA is only able to change future benefits if this is determined;
• Which of these options would be taken forward will be determined by consultation between the PSPA, Government and representative organisations after each cost sharing valuation.

The cost share will be 75% of any cost increase or cost saving will be recovered from scheme members with 25% of any cost increase or saving recovered from Government/Employers.

In order to be able to undertake the first cost sharing valuations of schemes in 2022, the PSPA will need to determine a baseline position which will be based upon the 2016 actuarial valuations of schemes, from which it will then measure how things have changed when the first cost sharing assessments are due in 2022. It is anticipated the baseline position will set by mid-2021.  

The Cost Sharing “Baseline Position” has been set using the scheme member data as at 31 March 2016 and a set of financial and demographic assumptions applied to an actuarial methodology.

This is an actuarial valuation of GUS and Teachers Schemes that has set:

•   the ‘target’ cost of benefit accrual against which the first 2022 cost sharing valuation results will be referenced against; and
• the cost sharing fund which will equal the value of all benefits accrued up to 31 March 2016.

The Cost Sharing Baseline results are summarised in table below:

*this is the total cost, inclusive of member contributions  

The “Cost Sharing” will be the cost of the scheme against which “Cost Sharing Contribution Rates” (calculated at future Cost Sharing Valuations – the first will be in 2022 and the results available in late 2023) are measured against. Any variation between the “Cost Sharing” and the “Cost Sharing Contribution Rate” may  (after consultation with member representatives and Treasury – see point 21) result in a change to the benefit structure and or member contribution rates.

The “Cost Sharing Fund” will be used as the base for all future cost sharing valuations.

The cost sharing mechanism will look at those factors which directly impact upon the cost of providing a pension for you and other scheme members. Therefore it will look at the experience of the scheme as a whole in terms of factors like:

• pay increases and the impact upon benefits,
• the age at which members retire,
• the benefits taken (e.g. all pension or some pension and a lump sum) and
• how long members will live on average after retirement and therefore how long the pension is likely to be paid for.

 Cost sharing will look ahead to what is expected to happen in the future but it will also look back to what has actually happened over the intervening 6 years between valuations (which is called the “past service” position) and compare this with what was expected to be the position. The cost change review will therefore consider both the future expected position and the reality of what has happened in the past in order to determine whether there has been a cost increase or a cost saving which needs to be shared.

The first Cost Sharing Valuation is due to be carried out over 2022-2023 and this will look back to the Cost Sharing Baseline starting position set by the Scheme Actuary, which is approved by the PSPA and Treasury. 

Because the first cost sharing valuation is not being done until 2022, we do not yet know whether there will be a cost increase or a cost saving. However, the Table below gives some examples of what might happen with various levels of cost change. This does not mean that the examples will happen but they show the impact of what might happen.

The table demonstrates what some possible outcomes of a cost sharing valuation would be for:

• An example member at AO (Administrative Officer) grade on a salary of £28,556 showing the monthly change in pension contributions relating to the percentage cost variation examples;
• Assuming total pensionable pay for all scheme members is currently around £273 million pa – examples showing the annual cash cost change in today’s terms if Government were to apply the percentage cost variation examples. 

Once the cost sharing valuation has been produced by the PSPA's advisers, a Committee will be formed by the PSPA comprising of staff representatives and officers of the PSPA, chaired by a member of the PSPA, which will consider the results of the cost sharing valuation and will report back to the PSPA on how any cost sharing changes should be implemented. It is hoped that the Committee will be able to agree how costs changes are brought in (i.e. by benefit changes or by contribution changes) but if not, ultimately any cost increases are likely to result in benefit changes whilst any cost savings may result in contribution reductions after Treasury is consulted.

It is important to note that before the PSPA can make any future changes to your benefits or contributions, it must draft a new Amending Scheme document which must be fully consulted upon with you and your representatives as well as with Tynwald Members and the Treasury. Whatever final recommendations are then made by the PSPA must go before Tynwald for formal approval before they can be implemented.

Therefore by way of the above process you will know in good time if there are to be any changes to your future benefits or contributions.

The following is a provisional cost sharing timetable:

September 2020 – determine assumptions to be used for the 2016 baseline valuation after discussions between the PSPA, staff representatives and Treasury;

By April 2021 – undertake the 2016 baseline valuation from which future changes will be measured;

July 2021 – communicate results of the baseline valuation to trade unions and Treasury;

March 2022 – determine the assumptions to be used for the 2022 first cost sharing valuations after discussions between the PSPA, staff representatives and Treasury;

July-August 2022 – PSPA compile information required for valuations and agree timescales with its actuaries;

January 2023 – PSPA provides membership data up to 31/3/22 to its actuaries for the purposes of the actuarial and cost sharing valuations;

February – April 2023 – actuaries review data and PSPA resolves any data queries;

June 2023 – actuaries produce the normal three-yearly actuarial valuations of schemes for discussion with the PSPA;

July-August 2023 – PSPA approves actuarial valuations of schemes;

September – October 2023 – PSPA’s actuaries undertake first cost sharing valuations of schemes;

November 2023 – PSPA establishes Committee of officers of the PSPA and staff representatives to consider and report to the PSPA how any cost changes resulting from the cost sharing valuations should be apportioned to active members of schemes;

January 2024 report provided to the PSPA who then determines how cost changes should be apportioned to active members of schemes;

January/February 2024 – PSPA consults on Amending Schemes to implement cost sharing changes;

March 2024 – cost sharing Amending Schemes go before Tynwald for approval;

April 2024 – cost changes, if approved by Tynwald, are applied to active scheme members’ benefits or contributions.

As you can see, any changes resulting from the first cost sharing valuations are unlikely to be implemented until 2024.

Once the 2022 cost sharing valuation has been completed, the process will be repeated again in 2028 and thereafter, at 6-yearly intervals. At each valuation any cost increases or decreases are proposed to be addressed before the following valuation comes along 6 years later such that this will be a rolling process every 6 years for all public sector schemes managed by the PSPA.