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

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Key messages

• Public service pension schemes have a long history and reflect the different needs of their employers and members. Employers currently pay contribution rates of between 11.5 and almost 25 per cent of pay to meet the expected long-term cost of the schemes. Employees’ contributions vary but on average are around a third of those of employers. To some extent, higher contributions reflect higher levels of benefit agreed at UK level. But there is no clear rationale for some of the variation in contributions between schemes.

• Pensions are earned according to pay and length of service, so there is significant variation in how much individual pensioners are paid, both across and within different schemes. Many pensions are low, reflecting relatively short service, low pay or a combination of both. Currently the average pension for women is about half that for men.

• In March 2010, there were 172,300 pensioners and dependants in the five main unfunded schemes, 13 per cent more than in 2005. The number of pensioners in the funded LGPS increased by 11 per cent to 141,400 over the same period. These increases are due to the earlier growth in public sector employment and because pensioners are living longer than previously forecast.

• Direct spending on pensions does not immediately or directly affect the spending power of the Scottish budget but changes in employers’ pension contributions do. The £2.2 billion cost of these contributions in 2009/10 is 19 per cent more in real terms than five years ago but this is mainly due to underlying increases in public sector employment and pay. Despite growing financial pressures on all the schemes, employers’ contributions for the three largest unfunded schemes have remained relatively constant at between 3.4 and 3.7 per cent of the Scottish budget.

• Significant cost pressures have built up in all of the schemes as a result of people living longer than previously forecast while long-term interest rate changes have increased the schemes’ reported liabilities. Reforms between 2006 and 2009 should help contain employers’ spending in all the schemes. In addition, in the teachers’, NHS and civil service pension schemes there is an agreement to share any future increases in pension contribution rates with employees. However, there is no similar arrangement for adjusting the share of costs for the police or firefighters’ pension schemes and the timetable for implementing this in the LGPS has slipped by one year to March 2011.

• Recent decisions by the UK government should help to alleviate further the potential for increases in employers’ contribution rates. However, the precise effect of these decisions and existing pressures on pension costs – and ultimately on the spending power of the Scottish budget – will not become apparent until later in 2011 or 2012.

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