Pensions will be more secure in an independent Scotland


  By Rachel Holmes
Earlier this week the Scottish Government published the latest in a series of papers providing detailed information on the future of an independent Scotland. The topic was the future of pensions.
One of the most significant public policy challenges for any developed country today, including the UK, is the funding of state pensions. 

  By Rachel Holmes
Earlier this week the Scottish Government published the latest in a series of papers providing detailed information on the future of an independent Scotland. The topic was the future of pensions.
One of the most significant public policy challenges for any developed country today, including the UK, is the funding of state pensions.  A recent report, by the Institute of Chartered Accountants of Scotland was seized upon by the UK government as evidence of the dire position Scotland might find itself in in terms of pension provision.

What was misleading about the headlines and response from UK politicians was that the report made no claim that Scotland could not successfully manage pension provision.  Rather the report pointed out questions that would need to be addressed. 

Pensions are not an issue for an independent Scotland alone.  In April 2012 the Office for National Statistics (ONS) calculated the total pension liabilities of the UK including public and private pension liabilities.  The results are startling:  the UK is now committed to paying £7.1 trillion in pensions to people currently working or to those who have already retired. 

This is the situation Scotland will remain part of if it chooses to stay in the UK.  A yes vote in 2014 would secure the potential for Scotland to manage a proportional share of state pension liabilities itself using tax revenues and income streams from pensions’ assets. 

There is evidence that Scotland would do better than the UK:  Scotland currently pays more in revenue to the UK treasury than it receives back.  For over three decades Scots have contributed 9.9% of total UK taxation but have received only 9.3% of total UK spending.  This includes Scotland’s percentage contribution to matters reserved to Westminster like defense and foreign affairs. 

For a similar period, Scots have produced more in tax per head of population than the UK as a whole.  In contrast, and despite Scotland’s surplus, the UK has now lost its triple AAA credit rating and built up more debt than any other developed country except Japan. 

This poor situation is reflected in UK state pensions.  The Melbourne Mercer Global Pension Index rates state pensions on a number of indicators for different countries.  Denmark is the best place to be a pensioner coming first in the world.  The Netherlands, Australia, Sweden and Switzerland all beat the UK with A or B ratings.  The UK is far behind with a C+ rating alongside Chile.

A challenge for Scotland is that, currently, it has an older population in comparison to the UK.  This is a demographic fact that would need to be improved.  But there is another aspect to Scotland’s specific circumstances.  Future life expectancy is lower in Scotland than the rest of the UK meaning state pensions liabilities accruing to an independent Scottish Government would be less than the UK average.  Combined with a stronger national balance sheet, Scotland is therefore better placed than the UK to begin the process of diffusing its share of the UK pensions’ time bomb.  This should be one of the first priorities of an independent Scottish Parliament.

There are inevitably other questions surrounding private provision of pensions, defined benefit schemes and occupational schemes.  But these are the same questions facing any country including the UK.  The risk is therefore not whether Scotland as an independent country has a pensions ‘black hole’ but rather which government, the UK, or Scotland with adequate control over its own resources, is better able to manage existing, inherited pension assets and liabilities. 

The figures suggest Scotland could do better using its advantageous financial position to prioritise paying down public sector pensions deficits whilst supporting the private sector’s efforts to do the same.  I therefore welcome the proposals of the Scottish Government to expand automatic enrollment for occupational pensions in an independent Scotland.

Westminster’s propensity towards the short-term is not limited to pensions’ policy.  The significance of the 2008 credit crisis for the independence debate is not the question of whether Scotland could have afforded to bail out RBS and HBOS.  The bailing out of banks does, and did not fall exclusively on the country of the bank’s corporate registration.  Barclays, an English bank received a massive bail out from the United States. 

It is not the banks’ headquarters location that determined the source of taxpayer support but rather where economic activity centered – mostly in London.  The UK including Scottish taxpayers bailed out those banks and others (including some headquartered overseas) because of the risk of contagion throughout the London financial system and broader UK economy. 

Ultimately the banking crisis was the result of loose regulation, introduced and maintained by successive UK governments.  Scotland has produced billions in oil revenues over the years, yet there is no sovereign fund at UK level from these which may have helped alleviate the burden on the tax payer.  That Scotland’s oil money has always gone to the Westminster treasury, to be spent in its entirety, rather than invested for the future, is a sad indictment of how previous resources have been squandered. 

The use of oil revenues brings us back to pensions.  A glance across the North Seas reveals Norway, with a sovereign wealth fund, the largest in the world, invested for the country’s pensions.  It was built up from revenues from North Sea oil.  The Sovereign Wealth Fund Institute publishes data on the investments funds created by governments for income generation. 

The most interesting aspect, in terms of the position the UK now finds itself in is seen in the most recent statistics, for May 2013: Norway has the biggest sovereign wealth fund in the world, with assets valued at nearly $716 billion invested, for the Norwegian people, in order to pay their pensions.  Below Norway are some forty or so other countries, some large in terms of population like China and some small like Ireland.  The UK does not rank on the list at all. 

The continued presence and investment by oil companies in Aberdeen and other areas and off Scotland’s shores, suggests there is more oil to come.  The UK government’s own statistics confirm this.  Nobody says it is unlimited but there is wealth there and what remains should be used wisely.  Given the performance of UK governments this will not happen under the current arrangements.

The UK has significant economic, political and social problems that can only be resolved with structural change.  In my view that change is only possible with the transfer of fiscal powers away from London to other parts of these islands.  My academic colleagues who research management tell me decisions are usually best made closest to the people they affect.  A yes vote is a rare opportunity to move beyond short-termism to a more sustainable future for this and future generations.

Rachel Holmes is a Chartered Accountant and Lecturer in Accountancy and Finance at The Business School, Edinburgh Napier University