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

The volatility in the level of reported assets and liabilities of the LGPS funds illustrated by Exhibit 13

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99. The volatility in the level of reported assets and liabilities of the LGPS funds illustrated by Exhibit 13 underlines the unavoidable yet substantial element of uncertainty and risk associated with pension provision in the long term. Significant swings in value can and have produced significant changes in the funding level, which in turn may affect the required contributions in the long term. This reinforces the importance of having thorough financial knowledge and expertise available to assist each fund in its operations and decisions.

100. The pressures to increase contributions as a result of factors such as poorer investment performance and greater longevity will be offset to some extent by recent UK government decisions. These include changing the index used to increase pensions every year from RPI to CPI, which will reduce pension liabilities. The decision to raise employees’ contributions by around three per cent will, of course, reduce the potential cost for employers.

101. On the other hand, making up pension fund deficits will be more difficult if the expected five per cent real reduction in funding support to councils in 2011/12 translates into a similar reduction in councils’ employees. Although a reduction in workforce may reduce the total level of contributions for current service, the sum required to make up the existing pension fund shortfall would remain the same but would be shared across a smaller payroll, which will increase employers’ contributions as a percentage of pay.

102. The combined effect of these factors on the relative contributions to be paid by employers and employees in future is uncertain. To summarise:

• People living longer will lead to pressures to increase contributions rates by two to four per cent and any reductions in the workforce will increase contribution rates required to make up pension fund deficits.

• The three per cent increase in employees’ contributions announced by the UK government will alleviate these pressures for employers.

• The change from RPI to CPI for the indexing of pensions will lead to reductions in benefits to scheme members of 15 per cent on average, but in doing so will also alleviate cost pressures for employers and employees.

• Uncertainties include pension fund investment performance, the detail of the cost-sharing agreement due to be implemented in March 2011 and the details of further pension reform to be announced before the UK budget.

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