Public sector pensions podcast transcript

Why has Audit Scotland published this report?

The level of interest surrounding pension schemes and the need to make financial provision for the later years of life has never been higher. We hope this paper will be a useful contribution to the current debate. It looks at the main public sector pension schemes in Scotland, how they are funded and what challenges lie ahead in their management. 

It will be of interest to those who are responsible for public sector pensions, to those who fund them, and to pension scheme members. It does not cover the state pension scheme, private pensions or wider matters concerning retirement income. 

What has the report found?

We have found that the combined funding shortfall and unfunded liabilities of the six main pension schemes in Scotland may be as high as £53 billion.

We also found that the discount rate used to value liabilities was not consistent across all the schemes, posing an issue for reporting on government accounts. 

The raising of life expectancy is increasing the value of pension liabilities schemes but changes to accounting rules have also affected the value of liabilities and increased these.

To keep employers’ contribution rates affordable, funded public sector pension schemes invest mainly in stock market equities and this makes them more vulnerable to sharp drops in value compared with other forms of investment.

Finally, the liabilities of unfunded public sector pension schemes in Scotland are increasing and there will be increasing demands on future public spending to meet these costs.

How do you hope this report will be used?

We hope the report will inform the public debate. Looking to the longer term, there are issues over how the increasing payment commitments for new pensioners are managed in pay-as-you-go schemes, and how well the funded schemes manage the funds to meet pension liabilities.

So is it good or bad news?

It’s good news that people are living longer but that brings challenges and additional costs. The longer period of retirement coming from increasing longevity means that pension liabilities have increased. 

If people are living longer they need a larger pool of funds to support a longer period of retirement or the planned period of retirement needs to be shorter.

Pensions are an important subject for us all and this report contributes to the information on the position of public pension schemes in Scotland. It is important that the position of the schemes and the issues are aired and understood. 

It’s also important to remember that pension provision is a long-term issue and the management of pension funds is carried out on a long-term basis with a long-term view.