Public pensions face major change and cost pressures

An independent commission chaired by Lord Hutton is currently reviewing public pensions across the UK. Next month it will publish options for major reform which could lead to higher contributions by employees. An Audit Scotland report published today, The cost of public sector pensions in Scotland, says the Scottish Government and councils will need to implement changes in Scotland to ensure that pensions are fair and affordable in future.

Today’s report looks at the country’s six main public pension schemes. These cover about one million people, in both current pensioners and those who have yet to retire. Public bodies pay £2.2 billion and employees £810 million a year towards the costs of providing pensions.

There are significant cost pressures in all the schemes both in the pensions paid out and the money paid in. Because people are living longer, the schemes are paying out more than anticipated. Growth in the public sector workforce has also increased the number of pensioners. The total amount paid out in pensions has risen by 30 per cent in real terms over the past five years.

On average, employees’ contributions cover around a quarter of total pension costs and vary between 1.5 per cent and 11 per cent of pay. Public sector employers pay the largest share with contribution rates ranging from 11.5 per cent to almost 25 per cent of pay. The report says that although higher contributions tend to reflect higher benefits in some schemes, there appears to be no clear reason for these variations.

Pensions are earned according to pay and length of service. The average annual pensions (excluding lump sums) range from £4,222 in the civil service scheme to £15,674 in the police scheme.

Auditor General for Scotland Robert Black said:

“Pensions are a large and important part of public sector pay - one in five Scottish people have or will get a public sector pension and it costs the Scottish public sector £2.2 billion a year to support the six major public schemes. With major UK-wide pension reforms imminent, the Scottish Government should look at the differences between the country’s schemes, and consider how to implement changes that will be both fair and affordable in the long term.”

Accounts Commission for Scotland chair John Baillie said:

“The Local Government Pension Scheme provides a very important service to employers and staff across Scottish councils and a range of associated bodies. However, over the past five years employers’ contributions to the scheme have increased by 25 per cent in real terms to £836 million a year. Scotland’s councils should now decide on the extent and pace of further reform to ensure the scheme stays sustainable. This includes considering how to share the increasing costs of pensions most fairly with employees.”