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

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18. Appendix 3 provides a summary of the main features of each of the six main schemes.

Contribution rates vary among schemes

19. Providing pensions is a long-term undertaking; today’s employees could be receiving pensions in 2070 and beyond. Because of the risks involved in making commitments over such a long period, good financial planning and a good understanding of future cash flows and cost pressures are essential. Over time, assumptions need to be reviewed and adjustments made. Government policy and legislation therefore requires actuaries to regularly evaluate the long-term cost of meeting pension commitments and recommend the overall level of contributions required to meet them. For the LGPS, this advice takes account of the expected returns from pension fund investments. There is a four year-actuarial valuation cycle for the NHS, teachers’ and civil service schemes and three years for the LGPS. The next actuarial valuations for these four schemes are due in 2012. After the valuations, contribution rates may be revised with changes due to take effect from April 2012.

20. All schemes need to ensure that contributions are sufficient to meet the long-term cost of pensions. Until recently, although some police and fire boards have had actuarial advice to forecast their liabilities and likely pension costs, full actuarial valuations of police and fire pension schemes have been rare. This should change, as the Scottish Government has introduced a new financial system from April 2010 that requires regular actuarial valuations. However, until 2010/11, police and fire boards paid pensions directly from their operating budgets and their contributions were set by the difference between the cost of pension payments and employees’ contributions, which resulted in very high employers’ contribution rates equivalent to up to 45 per cent of pay. The employers’ contribution rates for police and fire boards are currently based on rates for England and Wales and the Scottish Government will meet the difference between contributions received and pensions paid. The contribution rate may be revised once the valuations now required have been completed.

21. Pensions form part of the overall terms and conditions of employment and need to be considered in this context. The relative share of contributions between employers and employees reflects the history and circumstances of each scheme and the employees it was designed to serve. For example, police officers have a lower retirement age, which means that pension costs are higher with higher employers’ and employees’ contribution rates as a result. The lower retirement age for police officers reflects operational considerations including how far it is desirable for them to work for more than 30 years.

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