This is the case for Scotland to set up a single national pension fund

There are several reasons why Scotland should establish such a fund and the first of them was referred to in our article the following week. Unless all citizens are members of a pension fund then those who are not members are funding the pensions of those who are. If people’s spending on goods and services contribute to the investment income of a pension fund then everyone shares the benefit of this income if it helps to pay for their pension when they retire. A proportion of household spending eventually finds its way into the funds through their shareholdings in companies and investments in property and infrastructure.

With a single national fund, everyone would be contributing directly and indirectly to the fund and everyone would get the benefit of a secure pension out of it.

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A single national fund means that everyone has one source of their pension instead of several separate pensions from schemes provided by different employers. Changing employer would no longer mean changing pension scheme.

A national fund means that all investment risks are borne by the state. If we have our own currency and central bank the government can act as the guarantor, able to provide financial support for a national pension fund if there are short term shortfalls in the cash flows needed to pay pensions.

Defined benefit pensions provided by employers impose investment risk on the employer who has an obligation to make up any deficits. This means capital is diverted from the business in order to rectify any funding deficit in the pension fund. A national fund would eliminate this burden on businesses.

In the case of defined contribution schemes, which have now largely replaced defined benefit schemes, it is workers who bear the investment risk, and there is no certainty about what their pension will be – it depends on how much luck they have with the investment of their pension savings. A national fund, designed to provide a guaranteed earnings related pension, would eliminate this risk for people.

An important point to make clear is that the assets of a national pension fund would not belong to the state. Although the state would act as guarantor that the fund can always meet its obligations to pensioners, the assets belong to the people – their collective savings. The creation of a single national fund would not involve any transfer of ownership to or confiscation of assets by the state.

Would a national pension scheme be affordable? The funds required for a viable scheme depend on how it is designed and a variety of factors have to be taken into account: what level of pension is to be paid compared to earnings? How much pension rights are accrued every year (the “accrual rate”)? How long is the period of employment and what is the normal retirement age? What is the dependency ratio (the number of active workers relative to retired pensioners)?

Here is the outline of a possible design for a national pension scheme:

- Accrual rate 1/70 of earnings for each year of employment

- Joining age 18, normal retirement age 65

- Pension = 50% of earnings

- Dependency ratio 3 to 1.

Calculating the contribution rate (percentage of earnings paid as pension contributions) is pension as percentage of earnings (P) divided by the dependency ratio (D); C=P/D. In this example C=50%/3 = 16.6%

Contributions are made by employers and employees so the 16.6% could be split 11% employer 5.6% employee.

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These pension contributions would be sufficient to meet ongoing pension costs. If there are three million active workers and average earnings are £25000 per year, total wages in the economy are £75bn. 16.6% of this is £12.5bn. The pension fund would derive income from investments on top of this providing scope to reduce the contribution level to less than 16.6%

Pensions would come to 50% of average earnings for 1 million retired pensioners = £12.5bn.

This is a simplified model of the design of a national pension fund but it illustrates in broad terms that a national scheme would be affordable. There would be no further need to pay National Insurance Contributions.

As only 35 years of contributions is necessary, with the normal period of employment being 47 years (18 to 65) there is 12 years flexibility to take time out of work to study or for caring responsibilities without losing the opportunity to accrue full pension rights.

We could do this – it is just a matter of political will and more detailed design work.