Open Minds on Independence #9: What happens to pensions after a Yes vote

Far from putting pensions at risk, independence gives us the chance to significantly increase the state pension. Even If we only match the European average that would double the current state pension. The UK could easily afford to do so but chooses not to, to help their friends in the City financial sector.

So what would happen to both state and private pensions when we become independent? A report about pensions in an independent Scotland published by the Scottish Government in 2013 states: “Everyone currently in receipt of the basic state pension, graduated retirement benefit, state earnings-related pension scheme or the state second pension would receive these pensions as now, on time and in full.”

The responsibility for paying that pension could transfer to the Scottish Government at the time of independence. That’s likely to be the subject of negotiation. Whatever arrangement is agreed upon, your pension would protected. It is certainly plausible that the Scottish Government could inherit the full pension liability.

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This would, however, require payment from the UK Government to the Scottish Treasury to release the UK Government from its obligations to pensioners, obligations that are cast iron. This would allow the Scottish Government to make a guarantee that pensions would be protected.

Such an arrangement would be best for people living in Scotland who have already accrued a portion of a UK pension through NICs, as they most would likely prefer to receive their pension from one government. For those people of working age who are living and working in Scotland at the time of independence, the UK pension entitlement they have accrued would become their Scottish State Pension entitlement.

Steve Webb, the then UK pensions minister, told a Westminster committee in 2014 that anyone who “accumulated rights” for pension cash would be entitled to the money after independence. There was absolutely no risk to the money.

Asked by Labour MP Ian Davidson at the Scottish Affairs Committee whether people could be assured their pensions would be secure if Scotland voted for independence, Webb answered: “Yes, they have accumulated rights into the UK system, under the UK system’s rules.”

Webb said that even if a Scot works all their life and then retires to France, they still have an accumulated pension right in respect of the National Insurance they have paid. Asked whether citizenship would matter, Webb said: “Citizenship is irrelevant. It is what you have put into the UK National Insurance system prior to independence.”

The cost of providing a pension in Scotland is currently around 6-8% cheaper than in the rUK because of lower life expectancy. Scottish Government figures suggest the taxation raised in Scotland is sufficient to pay for all services currently devolved as well as cover the pension and social security arrangements paid in Scotland by the UK Government.

So the cost of pensions to an independent Scottish Government would be lower than, or at most the same as, they are right now until the Scottish Government decided to increase the amount paid. There are currently no significant additional pensions costs to the Scottish Government associated with independence.

The infrastructure to deliver pensions is already in place. Pension Centres based in Motherwell and Dundee will continue to administer and manage state pensions. Public-sector employment costs in an independent Scotland are expected to increase by 1%, with 100 extra staff being required in social security and pensions at a cost of £25 million. However, they would generate additional tax revenues of £1.5m, as well as immeasurable benefits from increased personal spending. There would, of course, be additional costs if a future Scottish Government decided to increase the pension. The SNP conference in 2019 agreed that “as a minimum, an independent Scotland should plan to meet the OECD average for a Scottish State Pension as a top priority for all Scottish pensioners”

This is to say, there is clearly a willingness by the SNP to increase the state pension to the OECD average. This would mean an increase of around £200 per week per pensioner. We must remember the UK pension is the lowest in the EU as a percentage of final earnings.

How would we pay for that increase?

As have previously pointed out, Scotland is one of the world’s most naturally wealthy countries. The value of Scotland’s natural environment to the economy is huge and lays the foundation for Scotland’s continued prosperity as well as a sustainable economy that respects the planet and future generations.

It would be fair to say that Scotland’s natural wealth, alongside the other advantages of the Scottish economy would make it possible to afford a state pension at the OECD average level.

Occupational pensions will not be affected by independence. Private pension assets will be protected by existing legislation. That includes personal pensions, cash ISAs, lifetime ISAs and private investments without a fund to administer them. You will still be able to purchase bonds and tax-free savings but the Scottish Government – not Westminster – will be responsible for those bonds and making contributions.

Each occupational pension scheme establishes the conditions that govern the operation, which the company has to fulfil regardless of political circumstances. If you are due an occupational pension you will get your full entitlement in an independent Scotland as your contract with the supplier will still stand.

In the case of final salary pensions, also known as defined benefit schemes, a fund is obliged to pay you the amount that was agreed in advance. The only occasions in which this has not happened has been when the firm has gone into liquidation, in which case there are adequate industry protections to guarantee your investment.

The ultimate backstop is the Pension Protection Fund (PPF), which protects the entire pension of those who have already retired and 90% of those who are still working.

All protections that exist as part of the UK will also be in place in an independent Scotland.

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Private pension assets are currently held in banks and other institutions which operate cross-nationally. After independence, those companies will simply designate their offices in Scotland and England as their registered office for that nation and work under the pension laws of that nation. Your pension will be registered with the bank/pension provider in the nation in which you live.

The Scottish Government position is that tax-free savings products, such as private pension savings, will be supported and honoured in full after independence. These savings products will also be protected by compensation schemes. The Institute and Faculty of Actuaries has proposed a number of regulatory options for Scotland after independence. New equivalent Scottish regulatory bodies would be created, possibly funded by a proportionate industry levy (as is the case for the existing bodies).

To sum up: the state pension will be protected and will almost certainly increase; private pensions will be unaffected and protected by either existing schemes or bespoke arrangements created for an independent Scotland. In both cases your money is absolutely safe in an independent Scotland.