Friday, 12 September 2014

Scotland’s Pensions Future

By Institute of Chartered Accountants of Scotland. This article first appeared in the spring 2014 edition of the RSGS's magazine, The Geographer.

Pensions have emerged as one of the most fiercely debated topics pre-referendum, along with the more overarching issues of currency, and membership of the European Union. Perhaps this is not surprising, as security in retirement matters to us all.

The challenge for the Scottish Government is to demonstrate that an independent Scotland would be better placed to deliver a pensions system which meets citizens’ needs while ensuring that they would at least be no worse off in retirement.

The State Pension - From a public expenditure perspective, the State Pension is significant. In 2011-12, State Pension payments of £87bn were made by the UK Government, representing 41% of all social benefit payments and 12% of UK expenditure.

In Scotland’s Future: Your Guide to an Independent Scotland, the Scottish Government confirms an intention that current pensioners would continue to receive their pensions as now, on time and in full, and that accrued rights would be protected. A ‘triple lock’ would be adopted for the first parliamentary term of an independent Scotland to protect the value of the State Pension (and single-tier pension and guarantee credit) over time against prices or earnings, with a minimum annual increase of 2.5%.

The new single-tier pension would be introduced in an independent Scotland, as planned for the UK, in April 2016. This is to be paid in full to those with 35 qualifying years of NI contributions, with a proposed minimum qualifying period of seven to ten years. This could mean that someone who worked in England for six years during their working life and in Scotland for the remainder would need to work an additional six years to achieve 35 qualifying years of NI or credits, as is the case for workers from other EU states currently working in the UK.

Accepting that the State Pension Age should rise to 66 by 2020, as proposed by the existing UK timetable, Scotland’s Future commits to a review of this age and notes the possibility of postponing the planned further changes as laid out in the Pensions Act 2007. There is some uncertainty as to how to interpret the lower average life expectancy in Scotland. Scotland’s demographics, with a higher projected ratio of pensioners to those of working age population, mean that this is likely to be more of a challenge. Economic growth and inward migration may be possible solutions.

Public Service Pensions  - Scotland’s Future confirms that all public service pension rights and entitlements which have been accrued would be fully protected and accessible, and the Scottish Public Pensions Agency would deliver public sector pensions in an independent Scotland. This comes with assurances that the Scottish Government would take on responsibility for the pensions of active, deferred, and pensioner members of unfunded schemes, including members of UK-wide schemes living in Scotland.

Private Sector Pensions - ICAS believes it would be advantageous for the Scottish Government to continue, at least in the early years of independence, to adopt existing UK arrangements for pension regulation and protection, and to develop these over time. According to Scotland’s Future, the Government intends to roll over UK law, and to form a similar regulatory framework and Scottish equivalent of the National Employment Savings Trust.

There would be significant crossborder issues for schemes which currently operate UK-wide. Under EU law, schemes which operate in more than one member state must fund their liabilities in full, and any under-funding must be rectified immediately rather than through a staged recovery plan. Scotland’s Future lays out a three-year transitional grace period, which ICAS believes is wholly insufficient for many schemes which are currently funding their deficits over much longer periods. The European Commission’s plans to reform the Pensions (IORP) Directive could provide an opportunity for the rules around crossborder schemes to be altered in a manner which eases the problem.

The ability of an independent Scottish Government to deliver the proposed pension policies laid out in Scotland’s Future is largely dependent on future negotiations with the UK Government, the European Union, and other bodies.