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



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Defined benefit pension – an occupational pension where employee benefits are paid based on a formula using factors such as pay and length of employment. Investment risk falls on the employer.

Defined contribution pension (also called a money purchase scheme) – a certain amount or percentage of pay is set aside each year by an employer and employee and invested for the benefit of the employee. The amount contributed is fixed, but the benefit is not. There is no way to predict how much the pension will be worth upon retiring; therefore investment risk falls on the employee.

Discounting – a mathematical process that reduces amounts of money due to be paid or received at future dates to a present equivalent value expressed as a single sum. This reflects the fact that in general people value £1 received today more highly than £1 received at a future date (for example, because they could invest £1 received today to receive more than £1 in the future). Pension liabilities are valued using a set discount rate to estimate their future worth.

Discount ratelike an interest rate, a discount rate is set as a percentage per year. It is applied when discounting future financial payments to a present value. For example, at a discount rate of three per cent a year, £1 received in one year would be valued now at 97p. A lower discount rate will increase the reported value of future pension liabilities, although the liabilities themselves may remain the same.




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