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

Savings from recent reforms will only be fully realised in the long term and the impact of ‘cap and share’ schemes is untested

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Savings from recent reforms will only be fully realised in the long term and the impact of ‘cap and share’ schemes is untested

41. Many of the biggest cost-saving measures only affect new members of schemes, or can only be phased in gradually. Consequently, savings will be limited in the short-term and will only be fully realised after the members of the old schemes retire in 30 to 40 years.

42. As part of the reforms, a system known as ‘cap and share’ was introduced in the teachers’, NHS and civil service pension schemes. Under this, employers and employees share any increases or decreases in overall contribution rates after an actuarial valuation until a cap in employers’ contributions is reached. When the cap is reached, increases or reductions in contribution rates fall on employees, either by changing contribution rates or by negotiating changes to benefits. The National Audit Office estimated that across the UK cap and share will contribute to 60 per cent of the savings from the recent reforms in these schemes over the period 2009/10 to 2059/60.

43. However, not all cost pressures are included within the cap and share arrangements. For example, changes in life expectancy are included within the arrangement but changes to financial assumptions used to value pension liabilities are not. Because the arrangements have not been tested it is difficult, at this stage, to assess the overall impact of cap and share on controlling employers’ costs.

44. At present there is no cap and share system for police and firefighters’ pension schemes and the timetable for agreeing a system for cost-sharing in local government has slipped one year to March 2011. This could put pressure on local government employers at a time when they already have to make savings. Given the potential impact of cost-sharing, it is important that the Scottish Government and councils seek to reach an agreement on cost-sharing in time for the implementation of new employer rates following the next actuarial valuation.

45. The impact of recent reforms on contributions will not be quantified until the next round of actuarial valuations, which were intended to be completed in time for resultant changes to be introduced in April 2011 (police and firefighters) and April 2012 (NHS and teachers). They will also reflect more recent proposals from the UK government to alleviate cost pressures within all of the schemes. The valuations are not expected to be completed until 2012.

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