1. Occupational pensions are an important part of public sector workforce reward, recruitment and retention. They can also serve to provide adequate income when people stop working. Around one million people in Scotland currently have a direct interest in one of the six main public sector pension schemes, either as members or as pensioners and dependants (Exhibit 1).
2. In 2009/10, the six schemes paid out £2.8 billion to pensioners while public bodies contributed £2.2 billion and employees paid £814 million to meet their expected long-term costs. Because of the effect of these costs on the Scottish budget and the budgets of individual public bodies it is important the schemes are well managed and controlled.
3. Occupational pension policy is a reserved matter. Although the UK government has primary responsibility for policy, the Scottish Government has some influence on how UK changes are implemented in Scotland. This includes the ability to make secondary legislation, though the degree of change is limited by a mixture of UK government legislative and financial controls.
4. The main difference among the six schemes is that only the Local Government Pension Scheme (LGPS) is a funded scheme. (Pensions jargon can sometimes be complicated – we explain terms as they are used and there is a brief glossary of common pension terms at Appendix 1). As a funded scheme, the LGPS uses current pension contributions both to pay current pensions and to invest in assets and earn a return to help meet the long-term cost of pensions. Eleven lead councils are responsible for how the LGPS is controlled, financed and operated, within a policy and guidance framework set by Scottish ministers.
5. The other five schemes, which cover teachers, the NHS, the civil service in Scotland and police and firefighters’ are unfunded (also known as a ‘pay-as-you-go’ pension schemes – no fund is built up to help cover future pension payments). Employers and employees contribute as if the schemes were funded – the contributions are calculated using assumptions set by HM Treasury – and these contributions are used to pay current pensioners and dependants.
6. In June 2006, we published Public sector pension schemes in Scotland. This short report looked at the financial pressures the schemes were then facing. In particular, pension liabilities were increasing because the number of pensioners had been increasing and people were living longer than previously forecast. These pressures remain, while changes in the economic environment have led to a significant increase in the reported value of pension liabilities, linked to changes in the assumptions about interest rates.
7. The UK government has set up an Independent Public Services Pensions Commission (the Commission), chaired by a former Work and Pensions Secretary, Lord Hutton, to review fundamentally the way public sector pensions are provided. The Commission published an interim report in October 2010. It concluded that the case for pension reform is clear and that “the current public service pensions system has been unable to respond flexibly to changes in life expectancy”.
8. The UK spending review in October 2010 accepted the Commission’s interim findings. The Commission will publish its final report, looking at options for long-term, structural reform, in time for the 2011 UK budget due in March 2011. The Commission’s final report will have major implications for pensions policy and the reform of pensions, which the Scottish Government has already committed to consider. The recommendations in our report are concerned with areas that are outside the scope of the Commission’s review.