Pensions in an Independent Scotland

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6. Public Service Pensions

Key points

  • The Scottish Government remains fully committed to providing a pension and reward package to public sector employees that reflects their public service.
  • In an independent Scotland, all public service pension rights and entitlements which have been accrued for fully or executively devolved schemes would continue to be fully protected and accessible.
  • There would be no difference to individual contribution rates or benefit levels as a result of independence.
  • Scotland already has the people and the infrastructure in place, delivering high quality public pensions.
  • Public sector pensions policy has been imposed on Scotland with insufficient engagement and consultation. In an independent Scotland, the approach to negotiations about any future changes to public sector pensions would be positive and inclusive.
  • On independence, the financial management of the Scottish NHS and Teachers' schemes would transition from HM Treasury to the Scottish Government.
  • On independence, the public service pensions of members of currently reserved schemes who live in or work for Scotland - for example, the armed forces and civil servants - would continue to be paid in full.
  • Independence would also give a future Scottish Government the powers to fully consider issues such as the pension terms of all 'uniformed' services, including whether they should be able to access their occupational pension at a consistent age and the impact SPA policy has on the working and retirement patterns of Scotland's public servants, including doctors, nurses and teachers.
  • The considerations of the Independent Commission on State Pension Age would also have implications for the Normal Pension Ages of public service workers.

Introduction

262 Public services are essential to Scotland. Nurses, doctors, teachers, fire fighters and police officers, amongst others, provide vital services we all rely on. Pension schemes for the public sector, as with private sector schemes, provide a firm basis for individuals to save for their retirement.[152] They form part of employees' total reward packages, so are both valuable and highly valued.

263 Public sector pensions are not, as is often believed, excessively generous. In fact, average[153] pensions for the two largest public sector workforce groups, Local Government and the NHS, are around £4,700 (£90 a week) and £7,600 (£146 a week) respectively.[154] It is unsurprising, therefore, that the Independent Public Service Pensions Commission's final report to Government (March 2011), which preceded current reforms, noted that the commission had "firmly rejected the claim that current public service pensions are 'gold plated'." [155]

264 The Scottish Government would also reject such a claim. This Scottish Government remains fully committed to providing a pension and reward package to public sector employees which reflects their service, is fair to the individual, the taxpayer and the communities they serve, and is affordable and sustainable in that context.

265 This chapter first sets out the current landscape for public service pensions, including discussion of on-going UK Government reforms in this area. It then goes on to describe public service pensions policy in an independent Scotland, as proposed by this Scottish Government.

The public service pensions landscape in Scotland

266 Occupational pensions policy is primarily reserved. Decisions on the design, operation and financing of Civil Service and Armed Services pensions schemes, along with virtually all judicial pensions, lie entirely with Westminster.

267 Where public service pensions are devolved, this responsibility varies. The Scottish Government has executively devolved[156] powers for five of the main public service schemes in Scotland: NHS, teachers, local government, police and fire. These schemes must comply with UK primary legislation and the powers the Scottish Government has over these schemes are not uniform.[157] In contrast, occupational pensions policy for six public bodies,[158] a small number of judicial office holders working in devolved roles,[159] and for members of the Scottish Parliament are fully devolved to Scotland.

268 These differing arrangements mean that Scottish Ministers have full policy-making powers for less than 1% of the 965,000 members of Scotland's public service pension schemes[160] even though these schemes are wholly administered in Scotland (see Table 6.1 below).

Table 6.1: Membership and management of Scotland's public sector pension schemes

Scheme

Powers

Financial model

Management

Membership 2011-12

NHS

Executively devolved.

Secondary legislation requires HMT approval and must conform to UK primary legislation.

Unfunded scheme supported by AME[161]

Managed nationally by the Scottish Public Pensions Agency.

Active

162,376

Deferred

53,812

Pensioner

80,501

Total

296,689

Teachers

Active

80,260

Deferred

13,854

Pensioner

65,216

Total

159,330

Police

Executively devolved.

Can make secondary legislation without HMT approval, but must conform to UK primary legislation.

Unfunded scheme supported by Scottish DEL[162]

Managed locally by 7 local authorities and the former Lothian & Borders Police (now Police Scotland).

Active

17,596

Deferred

1,900

Pensioner

14,626

Total

34,122

Firefighters

Managed locally by 8 local authorities

Active

5,737

Deferred

345

Pensioner

4,777

Total

10,859

Local Government

Funded scheme supported by payments under Scottish DEL

Managed locally by 11 local authorities.

Active

202,338

Deferred

100,924

Pensioner

154,116

Total

457,378

Devolved public bodies

Fully devolved.

Can make required legislation unfettered by UK Government.

Mixture of unfunded and funded schemes, supported by Scottish DEL

Managed locally, some services outsourced.

Active

2,805

Deferred

2,271

Pensioner

1,708

Total

6,784

Source: Scottish Government statistics and pension scheme annual accounts

269 Scottish schemes are already wholly administered in Scotland by the Scottish Public Pensions Agency (SPPA), public service pension teams within eleven local authorities[163] and by the Police Service of Scotland.[164]

270 The SPPA is an Executive Agency of the Scottish Government, and has twenty years of experience in this field.[165] SPPA's mixture of multi-scheme policy and delivery responsibilities,[166] unique in the public service pensions landscape, is a significant asset. No other body in the UK has such first-hand knowledge and experience of both designing and delivering public service pensions policy. This includes developing policy for and the management of two major sets of reforms of public service pensions in the last ten years.

271 That strategic focus is augmented by experienced operational staff whose management of the NHS and Teachers' pension schemes has consistently been rated 'low cost and high quality' and which compares very favourably to peer service providers, according to independent, international benchmarking evidence.[167]

272 Local authority pension scheme administrators in Scotland have developed experience over decades, delivering services to around half a million active, deferred and pensioner scheme members and managing multi-billion pound investment funds. It is widely accepted that, over recent decades, the average funding level of the LGPS scheme in Scotland has been significantly better than that of the scheme in England and Wales and is currently around 10% (or £2.5 billion) better funded than the scheme overall in England and Wales.[168] This would suggest that the LGPS in Scotland is significantly more sustainable than its counterpart scheme in England and Wales.

273 The Scottish Government's custodianship of public sector schemes has been able to rely on strong partnership foundations and their supporting governance structures. These include tri-partite partnership fora which have operated successfully for many years, in which scheme employer and employee representatives, including leading Trade Unions and staff associations, work alongside SPPA and other Scottish Government officials to advise Scottish Ministers on the shape of future pension scheme policy.

274 The Scottish Government continues to place great stock in such governance models. As well as the obvious significant financial implications for individuals, pensions policy helps shape individual aspirations and expectations, and so any difficulties that emerge - on making changes to scheme terms and conditions through reform, for example - are always better tackled in partnership.

Scheme types

275 As is the case elsewhere in the UK, public service pension schemes in Scotland are predominantly Defined Benefit (DB) final salary schemes.[169] However, this is due to change from April 2015, as a result of wide-ranging reforms brought about by the 2013 Public Service Pensions Act. Although the UK Government has accepted the recommendation of Lord Hutton's influential independent review of public service pensions that schemes should remain Defined Benefit,[170] it has ruled-out the continuation of final salary arrangements beyond April 2015.

276 In taking forward these reforms in Scotland, the Scottish Government has decided that the replacement schemes would be Career Average Revalued Earnings (CARE) schemes from April 2015.[171] This recognises the fact that CARE schemes are demonstrably fairer to scheme members than final salary schemes, which tend to disproportionately reward higher paid workers. It is also in line with the recommendations of Lord Hutton's review.[172]

Financial models

277 There are two distinct financial models for meeting the costs of public service pensions across the UK - Unfunded, or 'Pay As You Go', schemes; and Funded schemes.

Unfunded (Pay As You Go) Schemes

278 Unfunded schemes are not backed by dedicated investment funds. Instead, Government receives contributions from active scheme members and their employers, which it uses as revenue to meet the cost of pensions to current pensioners. Under this model, which is unique to government-backed schemes, in-year cash surpluses of income (contributions) over expenditure (pension payments) are available for general government expenditure. [173]Conversely, in-year cash deficits require government to top-up the difference from other sources.

279 It is important to recognise, however, that scheme member contribution rates are set to reflect the cost of providing them with pensions in retirement. In that sense, contribution rates have no direct relationship to the amounts required for pensions currently in payment.

280 In line with Lord Hutton's 2011 recommendations, unfunded schemes will remain the main model for underwriting the cost of public service pensions across the UK.[174] The Scottish NHS, teachers', police and firefighters' schemes are unfunded schemes, as are their counterpart schemes for England, Wales and Northern Ireland, and the reserved UK civil service, armed forces and judicial schemes.

281 Although unfunded schemes provide occupational pensions for the broadest range of public sector employment types in Scotland, they account for just over half (52%) of the total number of members of Scotland's schemes. This contrasts with the position across the UK in general, where over 60 per cent of members of public service pension schemes belong to unfunded schemes.[175]

282 The UK Government meets any difference between income generated from pension contributions and the cost of annual pension payments for its unfunded schemes through Annually Managed Expenditure (AME),[176] as it currently does for the Scottish NHS and teachers' schemes. This is paid from general UK taxation, which includes contributions made by Scottish taxpayers. The Scottish Government currently meets the cost of its Police and Firefighters' pensions out of Departmental Expenditure Limits (DEL)[177] expenditure. This is also the case for the considerably smaller unfunded Scottish Legal Aid Board scheme.

283 Like their counterpart schemes across the UK, the majority of Scottish unfunded schemes currently pay out more on pensions than they receive in contributions and the gap is forecast to grow in future years. The Scottish NHS scheme currently has an in-year cash surplus, but this is forecast to turn into an in-year cash deficit in 2015-16.[178]

Funded Schemes

284 Unlike their unfunded counterparts, funded schemes invest employee and employer contributions to earn a return. Payments to current pensioners are paid out of cumulative investment income.

285 The largest Scottish scheme - the LGPS - is a funded scheme. As at 31 March 2011, its assets were valued at £23.7 billion against liabilities of £25.0 billion, giving an aggregate funding level[179] of around 95% at that time. The LGPS is underpinned financially by eleven pension funds (each of which has multiple contributory investment funds). Each of these is managed separately by a specific lead local authority, on a regional basis.

286 All of the considerably smaller devolved public body schemes, apart from the Scottish Legal Aid Board pension scheme, are also funded schemes, similarly supported by dedicated investment funds.

Income and expenditure

287 Pension contribution rates vary from scheme to scheme. Employer contribution rates are based on actuarial reviews of each scheme (known as scheme valuations) and currently range from 11.5% to 24.7% of pensionable pay. Employee contribution rates are set by government policy (see section on public service reforms below); and/or are dependent on the outcome of scheme valuations if cost-sharing arrangements are[180] in operation.

288 Average employee contribution rates in the main schemes in Scotland range from 6.3% for members of the LGPS in Scotland to 13.5% for members of the pre-2006 Police scheme, as shown in Table 6.2, below.

289 These significant differences reflect the different bases on which schemes were established. They also take account of the differential structuring of total reward packages provided to respective workforces; changes over time; and, in the case of Police and Firefighters' pensions, shorter careers within which to build up occupational pension entitlements.

Table 6.2: Membership & contribution rates, Scotland's main public sector schemes

Scheme

Employee contribution

(% pensionable pay)[181]

Employer contribution

(% pensionable pay)[182]

Workforce

Served

Active Members

2011-12

NHS

9.2% average

(Tiered by salary, from 5% to 13.3%)

13.5%

NHS Boards, GP and dental practices + direction bodies.

162,376

Teachers

8.9% average

(Tiered by salary, from 6.4% to 11.2%)

14.9%

Educationalists employed by local authorities, independent schools, FE institutions and HE institutions

80,260

Police

13.5% average pre 2006 scheme (tiered by salary from 13.5% to 14%)

12.0% average post 2006 scheme (tiered by salary from 10.7% to 12%)

24.7%

Police officers (support staff have access to the local government scheme)

17,596

Fire-

Fighters

12.9% average pre-2006 scheme (tiered by salary from 11% to 15%)

10.4% average post 2006 scheme (tiered by salary from 8.5% to 11.1%)

Pre 2006 scheme:

21.8%

Post 2006 scheme:

11.5%

Fire-fighters (support staff have access to the local government scheme)

5,737

Local

Government

6.3% average

(Tiered by salary on a 'banding' basis, from 5.5% to 12.0%)

16.6% - 20.5%[183]

Local authorities, other public service bodies (such as Scottish Water) plus some third sector bodies.

202,338

Source: Scottish Government statistics and pension scheme annual accounts290 Table 6.3 sets out the most recently published full-year figures for contributions income and expenditure on pensions (2011-12). Against these is also shown the estimated net liability for all of these schemes. Because the LGPS and the majority of devolved public bodies are funded schemes, liabilities for those schemes are shown net of scheme assets. As explained above, unfunded schemes have no assets to offset against liabilities.

Table 6.3: Contributions Income, Pensions Expenditure and Net Liabilities, Scotland's Public Sector Pension Schemes 2011-12

Income from contributions (£m)

Expenditure on pensions (£m)

Net Est. Liability[184]

(£bn)

Scheme(s)

Employer

Employee

NHS

603.00

296.10

856.00

25.30

Teachers

352.30

151.30

930.70

21.80

Police

152.18

65.44

302.54

9.03

Firefighters

28.21

15.03

79.80

2.29

Local Government

1,029.49

262.81

1,018.26

1.30

Devolved public bodies

20.73

5.26

20.35

0.04

TOTAL

2,185.91

795.94

3,207.65

59.76

Source: Scottish Government statistics and pension scheme annual accounts

291 It should be noted that Table 6.3 takes no account of the 3.2 per cent average increase in contributions taking place between 12/13 and 14/15, which will add £250m to employee contributions.

Public service pension reform

292 Public service pensions in Scotland are currently undergoing UK Government-driven reforms to implement a number of Lord Hutton's recommendations, based on the UK Government's response.[185] These reforms overtake previous UK Government reforms introduced between 2006 and 2009,[186] which increased Normal Pension Ages (the age at which scheme members can take the pension they have earned, unreduced), introduced cost sharing, and updated ill-health pension provisions.

293 The UK Government's current reforms have immediate and longer-term components which introduce significant changes in:

  • How schemes are valued and indexed;
  • Scheme design;
  • The amount public service workers pay for their pensions; and
  • Scheme governance.

294 Since June 2010, policy changes include the keynote change in the basis of annual indexation for public service pensions in payment, which took effect from April 2011; a change in the Discount Rate used to value unfunded public service pensions; and increases in employee contributions by an average of 3.2% of pensionable pay in three annual increments between April 2012 and April 2014.[187]

295 Longer-term reforms to be implemented from April 2015 will:

  • Replace current Final Salary pension arrangements with Defined Benefit designs principally geared around Career Average Revalued Earnings (CARE) arrangements;[188]
  • Directly link Normal Pension Ages (NPA) to individuals' SPAs; or, for Police and Fire services, setting NPA at age 60;
  • Establish new cost control and sharing mechanisms to enable adjustments to be made to future benefits or contribution rates;
  • Introduce a new governance regime, including a statutory role for the Pensions Regulator.

Public service pensions in an independent Scotland

296 Several points are clear from the discussion above.

  • Scotland already has a wealth of experience and expertise in delivering public sector pensions;
  • Scotland's stewardship of public sector pensions can, in some areas, already be argued to be have delivered more sustainable schemes than their counterparts in England and Wales;
  • Public sector policy has been imposed on Scotland with insufficient engagement and consultation;
  • It is not possible, under devolution, to consider public sector pension scheme design strategically in the context of modern, flexible and community-focussed public services.

297 The rest of this chapter sets out the policy positions of this Scottish Government for public service pensions in an independent Scotland.

Public service schemes currently fully or executively devolved to the Scottish Government

298 In an independent Scotland, all public service pension rights and entitlements which have been accrued for fully or executively devolved schemes would continue to be fully protected and accessible. There would be no difference to individual contribution rates or benefit levels as a result of independence.

299 For scheme members and existing pensioners of Scotland's schemes, there would be no change in their pension arrangements following independence. If, for example, a former NHS Scotland employee has retired, begun to draw their pension, and moves to live in England, the Scottish NHS pension scheme would continue to pay this pension, as it does at present.

300 Legislation and rules governing public service pension schemes for which the Scottish Government has full or executively devolved responsibility would continue to apply under the "continuity of law principle". Continuity of law also means no automatic need for changes to, for example, the terms of schemes and the benefits they provide. The arrangements for these public service pension schemes would therefore continue to operate as at present, until and unless the Scottish Parliament decided to make changes.

301 Further, in the vast majority of cases, governance arrangements for these schemes would not need to change. Responsibilities would continue as they are at present, and would be carried out by organisations with significant experience of pensions administration, including the SPPA.

302 The cost of these schemes is currently met from budgets for which the Scottish Government is responsible. Independence would not require any change in the funding arrangements for the local government, police and fire schemes, or for any of the devolved public body schemes. These are already financed from a mixture Scottish DEL budgets or, for funded schemes, the pension funds already in place.

303 On independence, the financial management of the Scottish NHS and Teachers' schemes would transition from HM Treasury to the Scottish Government.

Public service schemes currently reserved to the UK Government

304 The Scottish Government will negotiate with the UK Government on the future operation of services that are currently delivered on a UK basis and on inward transfers of staff. Within that context, the pensions of those staff within the current civil service and armed forces who work in Scotland's public service would be taken on by the Scottish Government. The Scottish Government would also take responsibility for existing pensioners and deferred members.

305 For current UK-wide public service pension schemes, the Scottish Government proposes taking its fair share of commitments based on meeting the pension entitlements of pensioners who live in Scotland.[189] Although the Scottish Government has set out a clear and unambiguous commitment on the pension responsibilities it will take on under independence, it also recognises that there would be a need for negotiation with the UK Government as part of the associated transfer of assets and liabilities.

306 In the transition period to independence, arrangements would be made for the continued administration of pensions for Scottish members of reserved public service pension schemes, allowing for a smooth transition to the relevant Scottish body.

307 On independence, the Scottish Government would ensure that the public service pensions of members of currently reserved schemes who live in or work for Scotland - for example, the armed forces and civil servants - continued to be paid in full. These pensioners would see no difference in the pension they received as a result of independence other than, at the appropriate time, a change in the body responsible for looking after those payments (the SPPA). The same applies to those who have deferred their public service pension - this would be fully honoured in an independent Scotland.

308 In sum, the Scottish Government considers that a key priority for an independent Scottish Government should be to ensure that public service pensions are affordable, sustainable and fair for the public service workers and their dependents who benefit directly from their provision. Doing so will help ensure that the public sector remains well-skilled and well-motivated as its employees deliver essential services across Scotland. This Scottish Government will continue to work in partnership with its key stakeholders to maintain such provision.

Future pensions policy in an independent Scotland

309 On independence, the pensions expertise that Scotland benefits from at the moment would be retained and it would be for future Scottish Governments to set policy for public service pensions. Scotland would have in its own hands the powers to undertake a strategic consideration of scheme design to produce a fair and flexible system that works for public sector employees, public service provision, the tax-payer, and the overall public finances. This may, of course, be a long-term prospect, bearing in mind the current substantive changes to public sector pensions. So in the short term, continuity and stability would be prioritised to reassure public servants of their current financial position as regards pensions.

310 There are a number of areas where future governments with full powers over public service pensions might wish to develop new policy.

311 Independence would make it possible for a future Scottish Government to consider the pension terms of all 'uniformed' services, including whether they should be able to access their occupational pension at a consistent age. For example, this would enable proper consideration of whether, as now, it is right that Prison Officers should wait until SPA to draw their occupational pensions, in common with Civil Servants and Local Government workers, or whether it would be more equitable for their Normal Pension Age to be in line with that of Police Officers and Firefighters. Independence would enable a future Scottish Government to consider such issues for other workers in 'blue light' services such as Ambulance staff and paramedics.

312 A future Scottish Government with a full range of powers at its disposal could also more fully consider the impact SPA policy is having on the working and retirement patterns of Scotland's public servants, including hard-working nurses, teachers and doctors.

313 This Scottish Government's proposal to establish an Independent Commission on the State Pension Age, which would examine the UK Government's timetable for increasing SPA to 67 between 2026 and 2028, would also have implications for the Normal Pension Age of public sector workers.

314 A wide range of differing arrangements apply to public service pension schemes in Scotland. The Scottish Government considers that, despite the findings of the UK Government's own independent Commission,[190] the current round of reforms implemented by the UK Government has done little to simplify the public service pensions landscape and that those reforms bring greater divergence in individual schemes' revaluation and accrual rates, making it harder for people to understand how the benefits on offer would change over time. Independence would allow a future Scottish Government to make it easier and more attractive for public service workers to save for retirement. It could also work with stakeholders to examine policies to improve transparency and remove unnecessary differences between schemes, while continuing to recognise the unique nature of the various arms of public service.