The cost of public sector pensions in Scotland Prepared for the Auditor General for Scotland and the Accounts Commission

All the pension schemes were reformed between 2006 and 2009 because of rising costs

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All the pension schemes were reformed between 2006 and 2009 because of rising costs

32. The Independent Public Service Pensions Commission has highlighted the main reasons for pension reform, in particular the need to deal with increasing costs. It reported that between 1999/2000 and 2009/10 the amount of benefits paid from the UK’s largest public service pension schemes increased by 32 per cent in real terms. It attributed this increase in costs mainly to an increase in the number of pensioners as a result of the expansion of the public service workforce over the last four decades, longer life expectancy and the extension of pension rights for early leavers and women.

33. The Commission reported that life expectancy had increased significantly. For example, women who worked in the NHS who retire at age 60 can now expect to live an additional 32 years, compared to an additional 20 years in 1955. Consequently people are spending more of their lives in retirement and receiving pensions for a lot longer than was expected when the pension schemes were set up. This has led to significant increases in pension costs and calls to make public sector pension schemes more affordable.

34. Life expectancy is continuing to rise. For example, in the Strathclyde pension fund, the life expectancy at age 65 for pensioners increased by one year between 2005 and 2008, from 19.3 years to 20.3 years for men and from 22.3 years to 23.2 years for women.

35. There is an unavoidable element of risk involved in the whole pension provision process as forecasts must be made over 60 years or so. Whilst errors in forecasting are therefore inevitable, there is also evidence that life expectancy has been systematically underestimated in actuarial assessments in recent years.

36. Changes to the population age structure will also affect the long-term affordability of pensions. Projected changes in Scotland’s population mean that the ratio of pensioners to working people is predicted to rise from one in four of the population to one in three by 2050. This means that there may be a smaller proportion of working age people to support pensions in future.

37. In 2004, the Turner Commission report Pensions: Challenges and Choices set out the challenges for pensions, including increasing life expectancy and decreasing savings rates for retirement. It called for a number of changes, including increasing the retirement age and reform of the state pension. Following this review and others, the UK government initiated reforms to make public sector pension schemes more affordable. These reforms, implemented between 2006 and 2009, increased the retirement age for most employees and revised benefits to help control costs and make the schemes fairer (Appendix 3). They included:

• an increase in the normal pension age (NPA) from 60 to 65 for new entrants into the civil service, NHS and teachers’ schemes (existing members of the schemes keep an NPA of 60) and an increase in NPA from 55 to 60 for new entrants to the firefighters’ scheme (but existing members keep an NPA of 55)

• changes in employees’ contribution rates in most schemes and higher entitlements relative to length of service, with costs offset by removing automatic lump sums

• new agreements for cost-sharing between employers and employees in the civil service, NHS and teachers’ schemes

• the phasing out of early retirement under the ‘rule of 85’ in the LGPS, so that by 2020 the NPA for all LGPS members will be 65.

38. Each of the reforms involved negotiation and agreement between employers’ bodies, trade unions and the Scottish Government. The National Audit Office has recently estimated that, for the whole UK, £59 billion savings would be made over 50 years from the changes for the civil service, NHS and teachers’ schemes and that by 2059/60 the changes will reduce the projected cost to taxpayers by 14 per cent.

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