Scottish Local Government Finance Statistics 2022-23

6. Pensions

Expenditure and income from local authority pension funds are entirely separate from the expenditure and income of the authorities’ themselves. In accordance with Regulations 9 and 65 of the Local Government Pension Scheme (Scotland) Regulations 2014, expenditure on pensions, lump sums and the costs of managing the pension are paid from the Pension Fund. Income from employer and employee contributions is paid into this fund, which then generates investment income.

Expenditure and income figures should not be used to gauge the health of a pension fund, as the ratio of expenditure to income will depend on a number of factors, including 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.

Table 6.1 shows the movement in net assets of the local government pension funds in 2022-23. The opening net assets of the pension funds at 1 April 2022 was £61,826 million. This decreased by 2.4 per cent, or £1,463 million, over the year such that the closing net assets at 31 March 2023 was £60,363 million. The majority of this decrease was driven by a total net return on investment in year of minus £1,054 million – this is discussed in more detail in Chapter 6.4.

Source: LFR 24

Chart 6.1 shows the closing net asset position of local government pension funds from 2018-19 to 2022-23. Over the five year period, closing net assets have increased by 25.2 per cent, or £12,148 million, from £48,216 million at 31 March 2019 to £60,363 million at 31 March 2023.

Source: LFR 24

6.1 Members, contributions and benefits

Chart 6.2 shows the number of members enrolled in local government pension schemes between 2018-19 and 2022-23 by type of member. At 31 March 2023, there were a total of 652,753 members enrolled in these pension schemes, an increase of 0.3 per cent, or 1,992 members, from 2018-19.

Source: LFR 24

The split of types of member has remained broadly consistent across the five year period shown. Active members, that is members who are actively contributing to the pension fund, have been the largest category of members across all five years, accounting for just over two-fifths (40.2 per cent) of the total membership in 2022-23. Deferred pensioners, that is members who choose to continue to work beyond retirement age, made up around a quarter (25.6 per cent) of the total in 2022-23. Retired pensioners have been the second largest group across all five years, accounting for 29.5 per cent of the total in 2022-23. Pensioners’ dependants are the smallest group and make up only 4.7 per cent.

6.2 Contributions from Members

Contributions from employees and employers represent payments for pensionable service accrued during the year which will be paid out as part of an overall pension at a future date. These contributions can be thought of as income to the pension fund and are dependent on the number of contributing employees, both full time and part time.

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. This means contributions from employees and employers tend to remain stable over time, as shown in Chart 6.3.

Please note that contributions include those from other employing authorities.

Source: LFR 24

In 2022-23, total contributions provided £1,647 million of income, an increase of 5.1 per cent, or £80 million, from 2021-22. Just over three-quarters of total contributions (77.0 per cent or £1,267 million) came from employers, with the remainder coming from employees. This proportional split of total contributions has been stable over this five year period.

6.3 Benefits Paid to Members

Benefits paid to members include pension payments to retirees or dependents, as well as lump sum payments made to members on retirement or upon death. Benefits paid may also include payments made for injuries, however these figures are often zero or of small value.

Chart 6.4 shows the pensions and lump sum payments made to members over the last five years. Total pensions paid out in 2022-23 was £1,293 million. This has increased year on year since 2018-19. Total lump sums paid out in 2022-23 was £373 million; the highest value since 2018-19.

Source: LFR 24

6.4 Net Return on Investments

Pension funds invest in financial markets and other assets. These investments are generally managed separately to the administration of contributions and benefits of the scheme. A pension fund’s net return on investment reflects income and expenditure incurred directly relating to the investment, as well as any changes in the market value of the investment, in year. This figure does not include expenses paid to manage the investment. Therefore, the net return on investment is volatile and is directly influenced by investment conditions; for example, changes in financial markets.

Chart 6.5 shows the net return on investment from 2018-19 to 2022-23. In 2022-23, net return on investment was a loss of £1,054 million, a decrease of £5,541 million from 2021-22. The negative net return in 2019-20 reflected the impact of the Covid-19 pandemic on financial markets at the start of 2020 and the corresponding decrease in pension investments across all local authorities. The variation in net return on investment between years reflects the volatility of this figure.

Source: LFR 24