Report outlines funding pressures on public sector pension

Audit Scotland has today published a report on the six main public sector pension schemes, which will provide retirement benefits to about 950,000 people. Nearly one in five people living in Scotland has some entitlement to a public sector pension.

The largest pension scheme examined covers local government:

• It is a funded scheme managed by 11 separate administering authorities, with the contributions of employers and employees invested through pension funds to provide the future pension benefits. The assets in these funds were valued at £11.4 billion at 31 March 2005.
• The local authority pension funds have been invested mostly in equities. A new accounting standard, FRS 17, requires that fund assets are valued at their actual market value, whereas actuaries had previously eliminated the effects of peaks and troughs in the stock market by using smoothing techniques. Liabilities under the new accounting standard were about £15 billion at 31 March 2005.

The other five main schemes are unfunded:

• The police and fire pension schemes are paid from the current contributions and the balance is met by employers. The current cost to employers in the fire scheme is up to 31% of the payroll and for police this is up to 21%.
• For the other three unfunded schemes covering the NHS in Scotland, Scottish teachers, and the civil service, employers’ contributions range from 12% to 24%.

Robert Black, Auditor General for Scotland said: “The expectation that people will live for longer is increasing the value of pension liabilities. The new accounting rules are also having an effect as the discount rates for valuing liabilities have reduced. However, the ways in which liabilities are calculated are not consistent across all the schemes and this makes it harder to report on the overall situation.

“Audit Scotland calculates that the level of unfunded liabilities in the five main schemes administered in Scotland may be as high as £43 billion. This excludes the main civil service scheme which is administered at the UK level. If the civil service scheme is included the unfunded liability for Scotland may be about £53 billion.

“It is important to remember that pension provision is a long-term exercise. There will be short term gains and reversals and funds are managed with this in mind. Our report provides a snapshot of a situation that changes with the financial markets.

“However, the funding shortfall and unfunded liabilities of public sector pension schemes in Scotland are increasing. The contributions from both employees and employers will almost certainly increase and there are likely to be demands on future public spending to meet these costs.”