One of the main weapons in the arsenal of the No campaign is to induce fear in the public over their pensions. It’s a strategy based on the generally inadequate knowledge that most of us have over our pensions, so the “Better Together” coalition has been handing out flyers proclaiming that “the pensions of 1 million Scots are guaranteed by remaining in the UK” – the implication being that outside of the UK they wouldn’t be.
But since we can generally assume the contents of their leaflets to be somewhat economical with the truth, what would happen to our pensions after independence?
Pensions are difficult to understand. There are many options, many providers and mostly all that happens is we get one through our work, or through a financial advisor or bank. The average person on the street trusts these institutions to deal with this difficult subject and concerns themselves with no more than “how much goes in” versus “how much should come out”. It’s a situation that has allowed the UK public to be ripped off over the years without even knowing it, but we’ll get to that later.
The modern solution to the problem of being incapable to earn one’s keep due to the advancement of age was first hit upon in 1834, when the UK introduced a pension system covering all civil servants who had at least 45 years in post, giving them a pension of 1/60th of their final salary for each year’s service. The scheme was a great hit and soon the concept had branched out into the first occupational pension schemes for blue-collar workers, in the form of “friendly societies”.
The civil-service system was widely copied, but ran into problems as it was contribution-based. This meant that when aggressive European states wanted funds for weapons, there was a ready source ripe for tapping. The aftermath of World War 2 meant that the pension systems in Europe worked on a sort of national pay-as-you-go basis, with current pensioners being supported by those workers paying into the scheme at the same time, as a means to stop the build-up of large reserves of capital that would prove too tempting to governments.
The UK didn’t have that problem as in 1946, based on Beveridge’s work on welfare, the State pension was reintroduced as an element of the public social security package to which each person was entitled. As such there was no need to look at the relation between pensioner’s incomes and the pension they would receive.
The premise was that the benefit would be universal and financed by general taxation, ensuring that no pensioner would be caught without this state-provided safety net regardless of how their circumstances changed. But in the modern world there are other add-ons to that state system and many of us have private pension schemes either personally sourced or as part of our work.
In order to make this as easy to understand as possible let’s split those options into state pension and private pension, and cover each separately.
First of all, just what exactly is the state pension? Currently you have to work for only a year to be eligible for the state pension, and have paid in National Insurance for 30 years to get the full amount (If you only worked for 28 years you would be entitled to 28/30ths). This is the basic state pension of £107.45 per week and is set up to increase by either earnings growth, the Consumer Price Index (the different Retail Price Index was previously used) or 2.5%, whichever is highest.
On top of that basic state pension there’s also the less well-known State Second Pension (or S2P, previously known as SERPS, and which people can opt out of and have the money put into their own private pension schemes) based on the National Insurance contributions an individual has made, and for those unable to live on the standard amounts there’s the means-tested Pension Tax Credit. But this system is about to be ripped apart by Westminster’s latest pension reforms.
If Scotland votes No in 2014, Scots (and everyone else) can look forward to a new state pension system where there is only a basic state pension – at the increased rate of £144 per week – without any of the other add-ons. On face value this looks good – it represents an increase of over one third in the basic state pension, and means that women who take time out for childcare and those on lower incomes will benefit, given that they generally don’t build up better S2P entitlements.
For pretty much everyone else it’s a bad deal. Eligibility has been altered to 10 years of National Insurance payments and 35 years for the full amount (so if you work for 28 years you’d now only get 28/35ths – 80% – of the maximum, whereas previously you’d have got 93.3%). Employees and employers will also have to make an additional five years’ worth of NI payments due to the increased eligibility period – money which will of course accrue to the Treasury in a net £9bn windfall.
While it may be true that funding isn’t devolved, administration is, and the experience of Northern Ireland – where all welfare payments in Northern Ireland are administered through the Northern Irish Government and not the Department of Work and Pensions – proves the system could be run from Holyrood just as easily. In fact Scotland already has its own Scottish Public Pensions Agency which administers pensions for the devolved areas of government already under our control.
(A fact that’s often overlooked when discussing taking on the pensions for civil servants, the armed forces or Royal Mail employees in UK-wide schemes. The systems are already in place and can be adapted to accommodate the enlargement.)
So given that there is no large capital fund to split, and that the departments and expertise already exist to make the transition to managing all pensions, the only real question is therefore could Scotland afford to pay the pension liabilities.
Scotland raises 9.6% of UK revenues and receives back only 9.3% of UK expenditure in return, but spends 15% of GDP on “social protection” compared to 16% for the UK. We are already paying for our share of pensions – it takes 40% of Scottish tax receipts to fund the welfare state, compared to 42% for the UK as a whole. Despite UK government claims to the contrary, welfare (including pensions) is more affordable to Scotland than the UK.
Private pensions, meanwhile, are wholly contribution-based, on payments from the employer and the employee. The fund into which these payments are made is run under a contract held between you and your pension provider. Upon independence the terms and conditions of that contract will still be valid, whether they are in Scots law or English law. Your contract with your provider will continue uninterrupted and unaltered.
Unlike a state pension, private pensions are funded directly by the recipient, based on accruing pension pots. The value of your pension pot depends on the value of the pension company’s investments in the stock market – during your lifetime they may rise or fall, as the small print always says.
A share of stock is literally a share in the ownership of a company. When you buy a share of stock, you’re entitled to a small fraction of the assets and earnings of that company. Assets include everything the company owns (buildings, equipment, trademarks), and earnings are all of the money the company brings in from selling its products and services.
Even if the company is profitable, shareholders won’t necessarily receive a cheque in the mail each year with their cut of the profits. Only a few companies, usually long-established firms, hand out annual profit shares in the form of cash payments, called “dividends”.
Most new companies are considered “growth stocks”, meaning that the company reinvests all profit to fuel growth and expansion. In the case of growth stocks, the investment only increases in value as the stock price rises. This is how the pension fund grows – it buys stocks low and then sells them high (or at least aims to).
Being independent will not affect how your stocks do any more than a pension fund investing in stocks on the NYSE in $USD does at present. The stock markets are trading in $USD, £GBP & €EUR, as well as other currencies elsewhere. A pension fund from Scotland does not need to operate through a Scottish Stock Exchange. They can continue to work in the exchanges they currently use, so any notion that Scottish pensions are reliant on the London stock exchange and they would lose access to this upon independence is incorrect.
So neither state nor private pensions would be at risk in an independent Scotland. But is it enough that independence would merely have no negative impact on Scottish pensions? You don’t win people over to your side by promising them more of the same. But we’re in luck here also – there’s something which could be done about private pensions in the UK that could make a real and lasting difference to Scottish society in the long term.
UK savers are currently retiring with pension pots worth 50% less than some of their European counterparts, despite having invested the same amount of money, because of an array of hidden charges. With innocuous-sounding fees of 2.5% the pension funds can grab nearly half of a lifetime’s savings, without the pension saver ever realising that their retirement fund was being syphoned off by a banking system designed to benefit big business over individual savers.
“If a typical British and a typical Dutch person save the same amount of money for their pension, the Dutch person will end up with 50% more income in their retirement than the Briton. There is no trick here. No special tax considerations. No clever investment strategies. It’s just that the Dutch have an efficient architecture for their savings. We do not.”
So why are we letting our pension entitlement be eroded in order to maintain the profitability of big business? There simply isn’t the will at the UK level to legislate for pension fees, so powerful is the City lobby at Westminster on the grounds of the size of its contribution to tax revenues.
But an independent Scottish government – which would be vastly less dependent on the financial services sector, due in large part to oil wealth – wouldn’t be nearly so beholden to bankers as the UK government has allowed itself to become. People could have bigger pensions (or retire years earlier than their rUK counterparts) if legislation was introduced to curb the excessive charges made by pension funds.
The future for the UK’s ageing population is a grim one. Within the Union we’re all going to have to work for years longer before receiving a pension whose eligibility age is already beyond the life expectancy of many Scots, and whose real value is being not only eroded by fees but by dirty tricks like the switch from RPI to CPI (in the public sector) and Gordon Brown’s 1997 “raid” (in the private sector).
Scotland can already afford pensions better than the UK as a whole. Independent, it would be free of the self-serving private-profit tyranny of the City of London and able to do better still for its citizens, whether public-sector employees or private-sector ones.
In 2014, Scots will have to decide whether they want to work years more into their old age in order to subsidise not just pensioners in Kent and Sussex, but also the continuing vast salaries of the bankers and hedge fund managers who caused the economic disaster in the first place. It’ll be an interesting choice.