88. Between 2005/06 and 2009/10, payments to LGPS pensioners and their dependants increased by 26 per cent in real terms, from £667 million to £840 million (Exhibit 11). Over the same period the number of LGPS pensioners increased 11 per cent from 127,000 to 141,400. The increase in pension payments reflects a combination of demographic factors and growth in public sector employment and pay over time. This is broadly the same effect as for the unfunded schemes (Part 3).
89. The increased spending on LGPS pensions also reflects higher spending on one-off tax-free lump sums payable when employees retire. Pensioners have exercised their right to swap some of their annual pension for lump sums, introduced from 2006. Over the past five years the cost of these lump sums to the LGPS increased in real terms from £82 million to £197 million (139 per cent) while payments for annual pensions increased from £585 million to £644 million (ten per cent). Similar to the unfunded schemes, higher lump sums lead to more spending in the short term, but in the long term they may provide a cost saving to the LGPS as the cost is, on average, less than the expected amount of pension exchanged.
90. The LGPS as a funded scheme meets its pension payments from employers’ and employees’ contributions and investment returns. It currently achieves a cash surplus each year, which it retains and invests to help meet future pension costs. Because the LGPS is financed in this way, increasing payments to LGPS pensioners in any year do not represent a demand on the council budgets or on the Scottish or UK budgets. However, higher pension payments may reflect a longer-term cost pressure, which can result – and in the case of the LGPS has resulted – in increased costs for employers.