Pensions in an independent Scotland

The Scottish Government has published a paper ‘Pensions in an Independent Scotland’. Its main aim is to reassure voters that their pensions will continue to be honoured in an independent Scotland with continuity of systems and regulation.

State Pension
The eye catching headline “Scottish independence: People in Scotland could get pensions earlier” is not quite what the paper says. The actual commitment is, “we would also reserve judgement on the increase to 67 between 2026 and 2028”. This means that the increase from 65 to 66 will be implemented and they will ‘reserve judgement’ on the next step.

They are also proposing, “An Independent Commission on the State Pension Age would be established and tasked with considering the appropriate rate of increase of the State Pension Age (SPA) for Scotland over the long term.”

The retirement age has come under attack variously as a ‘gimmick’ and ‘unaffordable’. It may well be a gimmick as the actual commitment is a pretty modest review, but it is not necessarily unaffordable. The main factor in costing any pension scheme is life expectancy and this is significantly shorter in Scotland. In the occupational schemes I have negotiated this typically delivers a significant saving. However, that is also balanced by the concomitant higher death in service and higher number of ill health retirements in Scotland. This doesn’t immediately impact on state pension payments in an independent Scotland, but it will impact on higher benefits and NHS spending and that is ignored in the paper.

We should also not forget that the real disgrace in Scotland is the huge disparities in life expectancy – nearly 30 years difference between the poorest and most affluent communities. Life expectancy is linked almost entirely to income and many men and women in our poorest communities will not live to collect a pension.

Occupational Pensions
The paper also promises that, “Occupational and personal pension rights and accrued benefits would not be affected by Scotland becoming independent. An individual’s occupational or personal pension will already set out the retirement benefits which will be granted under the particular scheme and under which conditions.”

They will also continue with automatic enrolment and establish a Scottish equivalent of the National Employment Savings Trust (NEST) providing a workplace pension scheme focused on people with low to moderate earnings, which would accept any employer wishing to use it. Somewhat unimaginatively, there are no proposals to address the problems highlighted by the OFT last week, including huge management fees charged by funds. Other small countries, like Holland, do much better and this looks like a missed opportunity to offer a better pensions system in an independent Scotland.

I was making the point on the BBC this morning that the state pension does not provide an adequate income in retirement and we should put as big a focus on occupational pensions. People are working longer, largely because they have to, and this is impacting on the high levels of youth unemployment in Scotland.

Pensions protection will also remain unchanged with the commitment that, “The Scottish Government will ensure that arrangements for an effective compensation scheme are established, mirroring the level of protection provided in the UK Financial Services Compensation Scheme.”

A number of commentators have highlighted the problem with the EU IORP Directive that requires cross border pension schemes to be fully funded. The Scottish Government’s solution is to negotiate transitional arrangements for cross border schemes. Obviously this may just be wishful thinking, but in practice many schemes are large enough to split and that gets around the Directive as well. More disappointing, is that the paper gives no commitment to fully implementing the Directive in relation to local government funds. As we have highlighted, these funds should be separated from day to day council funds and could be better used to support the Scottish economy.

In 2016, the UK Government is planning to penalise employees who make sensible provision for their retirement in a contracted out pension scheme, by hitting them with a 1.4% increase in NI contributions. Employers will pay an additional 3.4%. The paper confirms that the UK Government estimates that the revenue raised through ending contracting-out for DB schemes will amount to around £6.1 billion in Great Britain in 2016. This is estimated to amount to around £520 million in Scotland in 2016. Of this around £320 million is estimated to be from public sector employers, £130 million from public sector employees and £80 million from private sector employees. Sadly, instead of returning this to workers and employers, the Scottish Government proposes pocketing this cash to their Treasury, in the same way as George Osborne plans.

The paper recognises the big changes in public service pension schemes that are currently being rolled out. The Scottish Government has meekly implemented the UK Government proposals and is not proposing to reverse any changes. The commitment is that, “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.”

The current level of spending is set out in the paper including a table on page 95. However, this overstates costs as it does not include the impact of current changes. I would also have expected some actuarial calculations on projected costs and the paper is weak in this regard.

The paper does recognise that the, “average funding level of the LGPS scheme in Scotland (the biggest fund) has been significantly better than that of the scheme in England and Wales and is currently around 10% (or £2.5billion) better funded than the scheme overall in England and Wales. This would suggest that the LGPS in Scotland is significantly more sustainable than its counterpart scheme in England and Wales.”

Conclusion
Overall, this is a useful paper that describes pension arrangements in Scotland well. The headline on pension age is actually something of a distraction. It seeks to present a ‘steady as she goes’ picture of pensions in an independent Scotland in line with the general ‘Yes’ campaign strategy of reassurance. It therefore lacks imagination and doesn’t address many of the faults in the current system, some of which could be addressed using current or extended devolved powers as well as through independence.