By Lucy Phillips
10 February 2011
Public sector pensions in Scotland need to be radically reformed to meet rising cost pressures, Audit Scotland has warned.
In a report published today, the watchdog says the country’s six main public sector pension schemes, covering about 1 million people and costing £3bn a year, are facing significant financial difficulties. This is mainly because people are living longer so the schemes are paying out more than anticipated.
Growth in the public sector workforce has also led to a 30% real-terms increase in pension payouts over the past five years.
The report, The cost of public sector pensions in Scotland, says that the Scottish Government and councils will need to make changes to ensure pensions are ‘fair and affordable’ in the future.
The warning comes ahead of Lord Hutton’s final report on UK public sector pensions, commissioned last year by the coalition government in Westminster and due to be published next month. Its interim report in October recommended higher contributions from employees.
In Scotland, employee contributions currently cover around a quarter of total pension costs and vary between 1.5% and 11% of pay. Public sector employers pay the largest share, with contribution rates of between 11.5% and 25% of pay.
Pensions are earned according to pay and length of service, with average annual payouts ranging from £4,222 in the civil service scheme to £15,674 in the police scheme.
Scotland auditor general 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 £2.2bn a year to support the six major schemes.
‘With major UK-wide pension reforms imminent, the Scottish Government should look at the difference between the country’s schemes, and consider how to implement changes that will be both fair and affordable in the long term.’
The auditors call on Scottish ministers to ‘provide a clear statement of the aims and objectives of the public sector pension schemes in Scotland’.
When it comes to the Local Government Pension Scheme, Scottish councils should ‘have a clear policy on whether to set a cap on the level of future employers’ contributions as a percentage of pay’, the report says.
John Baillie, chair of the Accounts Commission for Scotland, said: ‘The LGPS 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% in real terms to £836m 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.’
