The Positive Case for Pensions

Pension provision has become one of the key economic battlegrounds for the Independence debate.  When it comes to economic security in retirement, there is strong and positive case for why we are better to stay together as part of a joined up UK.

The first thing to say is that whilst our current pension system is not perfect, many of the benefits of the UK pension system are universally acknowledged.  There are many changes I would like to see to our benefits and pension systems, but breaking away from the financial security of the current UK state pension scheme is not one of them.

In our UK welfare system, Scots contribute resources to the common pool, and take benefits from it. Perhaps the most significant of these is the old-age pension, introduced first by a Welsh Liberal 100 years ago, but integrated into a wider system of national insurance and social security by an English Labour minister. When you are out of work in Glasgow your benefits are paid by the taxes of someone in work in Glamorgan. When you retire in Lanark your pension is paid by the taxes of a young person in Liverpool starting out in working life.

The UK has learned the hard way how to build a sustainable pension system.  The system that is now being built here offers a better combination of fairness, sustainability and predictability than most other countries in both the developed and emerging worlds.

It is not a system that is going to make anyone rich, but it will deliver, will stand the test of time and provides incentives and confidence for people to plan for their own retirement. It is a pension system that doesn’t over-promise and it is realistic about what can be delivered.  It provides people with the reassurance that, when it is time for them to retire, the benefits they thought would be there are actually there.

Looking to the future more people are living for longer.  The ratio of people receiving their pension compared to the percentage of people in work is rising. This will put pressure on public finances across the UK.  However the position in Scotland is worse with the proportion of people over pension age in Scotland projected to be higher than in the rest of the UK.  That will increase the pension bill.  

Carrying this cost is a bigger problem for Scotland than for the rest of the UK because of the age structure of our population. Within the union, however, that risk is pooled with the whole country – 60m people across a broad range of employment, age and earning power - and will not have to be borne purely out of Scottish resources. That’s a positive benefit of the union for Scotland.

The SNP Government, in its White Paper on Scotland future has proposed that an independent Scotland would have a more generous state pension system than is currently provided across the UK.  The headlines are a small increase in the state pension to £160 per week and the introduction of a “triple lock” to ensure the state pension always rose by more than average incomes, prices or inflation whichever is the higher.  Both good policies.  However, the White Paper (see Chapter 4, pages 138 – 150) whilst describing in detail the changes to the pension system an SNP administration would make, does not provide any detailed costings of these changes nor any analysis of the fiscal impact of the ageing population in Scotland in future years.  Nor does it make clear whether it will set up its own state pension fund and how it will be funded if it does.  Indeed the language talks about Scotland “administering” pensions on behalf of Scottish pensioners.  Does this mean it intends to reach an agreement with rUK to remain part of the UK fund, whilst deciding on its own rules for how it spends its share of the state pension “pot”. 

A recent Institute of Fiscal Studies Report has looked at the detail.  It concludes: “It seems likely that this slightly more generous system could not be sustained in the long term without discretionary tax rises or further cuts to spending on public services.”

The other key argument for remaining part of the UK is the potential risk to occupational and private pensions, which more and more working people rely on to top up the basic state provision.  EU rules on pension schemes operating in more than one country (“cross-border schemes”) are strict; they have to be fully funded and comply with much stricter actuarial standards than apply to single state schemes.  There is a real risk that Scottish pension contributions for occupational schemes may have to rise, benefits fall, separate schemes be set up just for Scottish employees, or even close.   The SNP recognise this in their White Paper (p148) and talk of negotiating transitional arrangements.  This seems to me, however, to be a risk that is just not worth taking.  Why risk changes to occupational pension arrangement that demonstrably work now?

The UK pension system is not perfect of course, nor is the system in any nation. But the UK system is built, it is sustainable and it has a broad spread of population to support it; a system built through the generations and there for the generations to come. That's something worth keeping.

The only way for Scotland to remain a partner in the UK pensions system is for Scotland to remain a partner in the UK, pooling and sharing our resources. For what is the UK national pension system but a form of collective insurance against poverty & indignity in old age where risk and reward is shared across classes, across regions, across nations, and across generations young and old.

It does makes sense to look at devolving some aspects of the benefits system to Holyrood e.g. housing benefit so that the detail of welfare policies could be better adapted to the different priorities and demographics in Scotland.  But when it comes to Pensions, I believe we really are better together.

It can take 50 years to prove that a pensions system works and by then it is too late to do anything about it if it doesn’t. In that respect, we are being asked by the Yes Campaign to make a calculated gamble.  That’s not a risk I think is worth taking.