Under most construction contracts, the contractor takes on the ground conditions risk. However, a recent case has demonstrated that the risk can fall on the employer.
This means that employer contribution rates for those employers participating in the NHS Pension Scheme, the Teachers’ Pension Scheme and the Civil Service Pension Scheme are likely to rise from 2015.
The Government believes that the shortfall across these three schemes is likely to amount to nearly £1 billion per year. The final valuations are due to be published over the coming months. The new contribution rate will be then be decided.
The Government has also outlined details of a new cost-capping mechanism which will operate in all public sector pension schemes from 2015 (or 2016 for the Local Government Pension Scheme). The cost cap is only partial, relating to future service costs. It also only applies to costs which relate to members such as changes in life expectancy, salary growths or career paths but not due to financial performance or technical valuation changes. Where costs rise or fall by more than 2% then member benefits or contributions may be adjusted in order to return costs to the level of the cap.
The Local Government Pension Scheme is also implementing an additional cost control mechanism in order to try to ensure that employer contribution rates are as constant as possible. This mechanism is likely to operate in a similar way to the mechanism outlined earlier with a proposed cap of 19.5% of pensionable payroll.
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