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Pension employer contribution rate changes and their impact on the Further Education sector in Scotland
Introduction
In circular letter SFC/46/06 we highlighted the results of a pension survey of the college sector that was carried out in conjunction with our analysis of the 2004-05 financial statements. All the Local Government Pension Schemes (LGPS) undergo triennial valuations the most recent being the valuation carried out at 31 March 2005. At the time the pension survey was requested the actuaries of the LGPS had not announced the results of the valuations and the employer contribution rates applicable for the years to 31 March 2007, 31 March 2008 and 31 March 2009. As a result the colleges had to estimate the future contribution rates and their effect in the survey returns.
The Scottish Teachers Superannuation Scheme (STSS) announced the results of the 2001 valuation of the scheme on 01 September 2006, and at the same time, the scheme also announced that the employer contribution will rise from 12.5% to 13.5% effective from 1 April 2006. In the STSS consultation paper the scheme made reference to the 31 March 2005 full scheme valuation, which is not due to be completed until early in 2007. The Government Actuary's Department has estimated that the overall impact of the 2005 STSS valuation will be an approximate increase employer contribution rate of 0.75% to 14.25%. This increase in employer contribution rate will be confirmed when the 2005 valuation is received and is likely to be implemented in April 2008.
Contribution rates changes from 1 April 2006 through 31 March 2009
The pension survey results as reported in August 2006 in circular letter SFC/46/06 are now out of date and the purpose of this paper is to incorporate the subsequent contribution rate announcements into the survey results previously reported. The costs shown in Annex A are taken from the survey returns, and have been amended to reflect the contribution rates announced after the original survey was completed.
The results show total additional pensions related costs of £200,000 for the 2005-06 academic year, £400,000 for the 2006-07 academic year and £2.2m in the 2007-08 academic year. The changes to the LGPS had relatively little impact on the survey results. Contributions to the LGPS' account for around 40% of the total pension costs and many colleges had anticipated the increase in rates and had forecast them accordingly. The changes to the STSS had a much greater impact on the survey results (additional costs of £600,000 and £2.4m in the 2006-07, and 2007-08 academic years respectively as colleges had not anticipated the employers' contribution rate increase.
Contribution rates from 1 April 2009 through 31 March 2012
None of the pension schemes, STSS or LGPS, have announced employer contribution rates beyond the year ending 31 March 2009. The LGPS employer contribution rates for these years have been estimated based upon past trends, with recognition that the rate of increase has for many schemes been declining as it reaches the 20% employer contribution mark. The assumptions made regarding LGPS are not critical however, as the overall impact on the total pension costs is minimal compared to the impact that STSS contribution rate changes have on the figures. A graph of the LGPS contribution rate trends is included in Annex B.
The assumptions made regarding the STSS contribution rate changes have a significant impact upon the college sector pension costs. The assumptions made are that the 0.75% increase (not yet announced) will be implemented from April 2008, and that a further 0.75% increase will be implemented from April 2010 in anticipation of the results of the 31 March 2009 valuation.
Annex C indicates that sector pension costs will increase by £1.5m, £0.9m and £1.3m from 2007-08 to 2010-2011, due to employer contribution rate changes, even if staffing volume and salary levels remain unchanged. The STSS rates changes account for 66% of the increase in costs.
Impact of staffing salary and volume increases on pension costs
Annex C also shows the estimated impact that a 3% or a 5% staff price/volume increase would have on pension costs. The tables show that for every 1% pa increase in salary price/volume across the sector, an additional £0.5m pa increase in pension costs is also experienced.