IN our series of articles for The National, the Scottish Banking & Finance Group (SBFG) has argued it is vital that Scotland’s banking and financial system is reformed so that after independence capital is allocated to support production of goods and services we all need.
So far the focus has been on banks but our workplace pension funds are also large pools of capital, containing workers’ savings for retirement. At present the total value of assets owned by workers’ pension funds in the UK amounts to £2.6 trillion – 123% of UK GDP.
It is reasonable to suppose Scottish citizens have in their pension funds a similar ratio to Scottish GDP, so these assets total something in the region of £200 billion.
Our economy is crying out for capital investment but our pension funds are not supplying it despite the fact that the ability of an economy to provide pension benefits to its citizens depends entirely on its ability to produce useful goods and services which meet our needs.
READ MORE: Scottish currency should be just the first step after independence
Our pension funds, which manage money belonging to citizens who pay contributions into them, invest in financial assets such as shares, government and corporate bonds, property, currencies and other tradable securities and derivatives.
Very little of this “investment” provides new capital for businesses – it is used for financial speculation instead. How can this be changed without affecting the security of pension benefits?
One possible reform would be to address the perverse tax incentives currently applying to pension funds. Pension contributions are subject to tax relief, the cost of which to the UK Treasury is about £60bn per year. If Scotland continued to provide this tax relief it would cost a Scottish Treasury about £5bn a year.
Continuing this tax relief could be made subject to a condition that at least 25% of all future new contributions are invested directly into businesses and public infrastructure. The alternative would be to abolish the tax relief and the Scottish Government could then have additional capacity to increase direct public spending into the economy by £5bn per year.
Another reform would be to introduce a new legal framework governing funded public-sector pension schemes – the Scottish Local Government Pension Scheme is the largest of them, with assets valued in the region of £45bn. There are 11 local authority pension funds, of which the Strathclyde Pension Fund is the largest with assets of £21bn.
The important feature of these public-sector schemes is that they get their funds from the public purse. All pension contributions into these schemes come out of local authority budgets which are financed either by central government grant or from local taxes. This means these schemes should have a duty not only to the members of the schemes (the “beneficiaries”) but also have a duty to the wider public.
The current legal framework governing pension schemes is trust law, under which pension fund trustees have a “fiduciary duty” to care for the “best financial interests” of the beneficiaries. There is no duty to the wider public and so the public interest is not taken into account when these pension funds make their investment decisions.
So one thing which needs to be reformed is the legal framework governing public-sector pension funds – trust law should be replaced by a new statutory framework which balances the interests of scheme members and the wider public interest.
READ MORE: These are kind of banks we’ll need in an independent Scotland
These are not contradictory or mutually exclusive objectives because the security of pensions in the future depends upon Scotland having a thriving, productive economy. While pension funds continue to focus primarily on the buying and selling of financial assets they are not contributing to genuine wealth creation but are stoking financial bubbles and financial crashes.
There is an important debate to be had about pension provision in an independent Scotland because so many citizens still do not have any pension provision other than the state pension.
While so many citizens remain outside the coverage provided by workplace pensions, it makes it all the more important that pension funds act in ways that benefit everyone, not just those who are fortunate enough to belong to a workplace pension scheme.
Unless we address this situation the reality is that those citizens who do not have the benefit of a workplace pension are subsidising, one way or another, the pensions of those who do. In the interests of social justice and equity, this is not a situation we should tolerate in a Scotland where these values are held in high regard.
We can, and we must, reform our pension system in Scotland, so that pension funds contribute to the development of our productive economy and so that all citizens can benefit from a pension system that delivers security for everyone when they reach their retirement.
Why are you making commenting on The National only available to subscribers?
We know there are thousands of National readers who want to debate, argue and go back and forth in the comments section of our stories. We’ve got the most informed readers in Scotland, asking each other the big questions about the future of our country.
Unfortunately, though, these important debates are being spoiled by a vocal minority of trolls who aren’t really interested in the issues, try to derail the conversations, register under fake names, and post vile abuse.
So that’s why we’ve decided to make the ability to comment only available to our paying subscribers. That way, all the trolls who post abuse on our website will have to pay if they want to join the debate – and risk a permanent ban from the account that they subscribe with.
The conversation will go back to what it should be about – people who care passionately about the issues, but disagree constructively on what we should do about them. Let’s get that debate started!
Callum Baird, Editor of The National
Comments: Our rules
We want our comments to be a lively and valuable part of our community - a place where readers can debate and engage with the most important local issues. The ability to comment on our stories is a privilege, not a right, however, and that privilege may be withdrawn if it is abused or misused.
Please report any comments that break our rules.
Read the rules hereLast Updated:
Report this comment Cancel