5. Local Government Pensions
The income and expenditure from local authority pension funds are entirely separate from the income and expenditure of the authorities themselves. Income from employer and employee contributions is paid into the Pension Fund, which also generates investment income. Expenditure on pensions, lump sums and the costs of managing the pension are paid for from this fund.
The income/expenditure figures should not be used to gauge the health of a pension fund as the ratio of income to expenditure will depend on a number of factors including the age of the fund and whether it is open or closed to new members. The relative financial health of the pension scheme is gauged through the three-yearly actuarial valuations carried out on each of the funds.
Expenditure on Pensions, £millions
Income by Type, £millions
- Total Expenditure was £1.3 billion in 2016-17, an increase of 6.5%;
- Total Income was £9 billion, largely due to very high investment returns;
- 95% of expenditure was on benefits;
- Income from investment and other income was £7.7 billion, an increase of £7 billion on the previous year. Investment income can be highly volatile and has ranged from negative £1 billion to plus £7.7 billion over the past 10 years;
- Excluding investments, income increased by 1.8% on the previous year.
Local Government Pension Scheme Funds are operated as separate funds to other accounts. In accordance with regulations 9 and 65 of The Local Government Pension Scheme (Scotland) Regulations 2014, employee and employer contributions are paid into the fund, along with income from investments, and pensions and lump sum benefits are paid out of the fund. The income and expenditure from these funds are therefore entirely separate from the income and expenditure of the authorities that administer the funds.
Tables 5.1 and 5.2 show the collective income and expenditure for the Local Government Pension Scheme for the year in question, with income from contributions representing payments for pensionable service accrued during the year which will be paid out (as part of an overall pension) at a future date and expenditure on pensions representing payments of previously accrued pension rights. The relative financial health of the pension scheme is gauged through three-yearly actuarial valuations of each of the eleven funds.
Table 5.1 – Local Government Pension Scheme Funds Expenditure 2012-13 to 2016-17 ( £thousands)
|Total Benefits including Payments under Pensions (Increase) Acts:||1,025,525||1,069,643||1,116,100||1,176,592||1,248,556|
|Lump Sums 1||242,232||235,963||238,777||269,346||301,442|
|Other Benefits 1||2,838||0||0||9,305||0|
|Payments under Pensions (Increase) Acts 1||179,156||190,925||205,688||221,274||225,863|
|Transfer Values 2||41,701||42,061||44,295||39,289||50,296|
|Total Expenditure 4||1,139,569||1,127,986||1,181,215||1,235,292||1,316,157|
1. Payments under the Pensions (Increase) Act 1971 relate to
costs associated with uprating of pensions. In some cases local
authorities were unable to separately identify this cost and
included it within pensions, lump sums & other benefits.
2. Transfer Values are due to scheme members transferring to other pension schemes (for example where a scheme member has moved to a different employer).
3. "Other Benefits" includes, Fund Administration and Management Costs (the largest component); Refunds of Contributions; Adjustments; and Premiums.
Source: Local Financial Returns: LFR24
Table 5.1 details the total expenditure of the Local Government Pension Scheme Funds in Scotland since 2012-13. Total expenditure increased by 6.5% (£81 million) between 2015-16 and 2016-17, with the vast majority (95%) of expenditure being on benefits.
Table 5.2 – Local Government Pension Scheme Funds Income 2012-13 to 2016-17 ( £thousands)
|Contributions (including those from other employing authorities)|
|Net Investment and Other Income 1||3,040,095||2,063,964||4,215,940||700,626||7,748,872|
|Total Income 1||4,176,022||3,221,662||5,395,535||1,935,990||9,006,692|
Source: Local Financial Returns – LFR 24
Table 5.2 shows local government pension scheme funds income since 2012-13. Contributions from employees and employers are both dependent on the number of contributing employees (full time and part-time) and increased by 1.8% between 2015-16 and 2016-17. Contributions from employees are fixed at a set percentage of pay, depending on level of salary. Contribution rates from employers are variable and are reviewed on a triennial basis, with actuaries determining the contribution rates for the following three years.
Net investment and other income increased by around £7 billion compared with 2015-16, however investment income in 2015-16 was lower than it had been in recent years. Investment income is volatile and is heavily influenced by investment conditions ( e.g. changes in the stock market), ranging from a loss of £1 billion in 2008-09 to a gain of £7.7 billion in 2016-17.