CONTRARY to the claims by Ros Altmann in The National on February 16 (“These are the factors to be considered in state pension argument”) that the issue of payment of state pension in Scotland after independence is fraught with uncertainty and complexity, it is actually very simple.

In 2021 National Insurance Contributions (NICs) paid by Scottish workers and employers totalled £11.5bn. The cost of state pensions paid to Scottish pensioners in 2021 was £8.5bn. In other words the state pension is Scotland is already met out of Scottish NICs. The continuation of this after independence is how the state pension will continue to be paid in Scotland.

Relying only on a state pension to provide an income in retirement is not enough for a decent pension for everyone, so we also need to consider what happens to workplace pensions and how we can restore “defined benefit” (earnings-related) pensions after independence.

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One way to achieve this would be to establish a new national pension fund open to all citizens, which provides an earnings-related pension to everyone and which is guaranteed by the state. A state guarantee is entirely realistic if we have our own currency.

Here is an outline of how such a fund could be created. The first stage would be for the government to pay state pensions but, instead of recovering the cost by treating NICs as a tax, the NICs could be treated as savings and used to start the national pension fund. In the first year the fund would hold £11.5bn, whilst the government deficit would be £11.5bn higher than if NICs were treated as a tax. After 2 years the fund would hold £23bn. The funds could start to be invested in the Scottish economy at an early stage.

There is also further funding to be found in the contributions by public-sector workers who are in “unfunded” pension schemes (teachers, NHS staff, firefighters, police and some civil servants). There are about 350,000 such workers in Scotland making pension contributions of about £2bn per year. These contributions could also be paid into the national pension fund whilst the government pays the pensions of pensioners who are in these schemes.

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After two years the fund will have about £27bn. At this stage it would then become possible to offer membership to workers who have built up “money purchase” (defined contributions) pension scheme savings. This group would have an option to transfer in the “pension pot” they have built up and obtain a credit towards an earnings-related pension. This process offers a potential route to the restoration of earnings-related pensions and the elimination of the uncertainties surrounding pensions based on money purchase schemes.

There is also another important aspect to establishing a national pension fund. A large majority of Scottish workers have pension assets and accrued pension rights in funds based in what will be a foreign country after independence (ie the rUK). Those pensions will be honoured but when they are they will be paid in sterling, not in Scottish currency. Furthermore, the investment of the assets will take no account whatsoever of the interests of the Scottish economy or the Scottish people. The existence of a Scottish national pension fund would provide a fund into which those pension assets and accrued rights could be voluntarily transferred.

By being designed to work together, a Scottish state pension and a Scottish national pension fund could create the foundations for one of the best pension systems in the world.

Jim Osborne
Scottish Banking & Finance Group