THERE has been much discussion lately about the inadequacy of the UK state pension and the need for the Scottish state pension to be increased substantially after independence, so that Scottish citizens have a decent level of income when they retire.
The state has an important role to play in making sure this happens but the discussion about how it is provided needs to recognise where we are and the legacy Scotland will have at the point of independence.
That legacy includes what is called “Pillar 2” pension provision, which is based on workplace pension schemes. Although there are many separate funds, together these pension funds are now very significant institutions with enormous economic power, which is exercised by a network of agents in the financial sector.
The current UK pension system has three “pillars”. Pillar 1 is the state pension; Pillar 2 is occupational pension funds; Pillar 3 is private individual pensions.
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Most people in employment nowadays are members of some form of workplace pension scheme (Pillar 2). These are distinct from private pensions which a wealthy minority invests in for themselves (Pillar 3). However, Pillar 3 also includes the private pensions of self-employed people, many of whom are no better off than most ordinary workers.
We cannot have a discussion about the future of pensions without talking about workplace and private pensions because we can neither wish them away nor scrap them, which is politically unrealistic.
Workplace and private pension funds in the UK now collectively hold £2.6 trillion in assets – Scottish citizens’ share of this total is about £200 billion.
While an independent Scottish state will play an important role in pension provision, we cannot afford to ignore the existence of workplace pension funds which are provided by both private and public-sector employers and are managed by a variety of financial sector agents in a system which lacks public accountability.
Private pension funds may provide greater choice over how funds are invested, but in the main, the vast majority of people who have a private pension have neither the time nor the expertise to make considered investment choices.
Ignoring the role of workplace and private pension funds means they will be left to carry on investing their funds in ways which are undermining the long-term health of our economy. Pension fund investment needs to be aligned with the broader economic objectives set out by a democratically elected Scottish government so that these funds support the development of a productive economy.
Decent pension provision is ultimately derived from the real wealth created by our economy. If our economy is not managed so that it has the capacity to produce all the things we need to live well and in harmony with nature, then the claims that pensioners have on society cannot be met.
No matter how much a pensioner believes their pension to be worth, if there is an insufficient supply of what we all need then pensions will be devalued and may even become effectively worthless.
Since it is politically unrealistic to consider scrapping workplace and private pension funds because it is tantamount to “levelling down”, the solutions to providing decent pensions are more likely to be found by seeking to extend universal earnings-related pensions to all citizens by including everyone in a national pension scheme.
The role of the state would then be to supplement that where necessary to guarantee a minimum pension for all citizens. There would then need to be a debate about how much of an individual pension is to be provided by the national pension scheme and how much by the state. The state would also need to guarantee a minimum pension for citizens who, for one reason or another, do not qualify for a maximum pension entitlement from the national fund.
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Levelling up pension provision in this way implies that a national pension fund becomes a new Pillar 1 while the state pension becomes Pillar 2 and the need for Pillar 3 disappears.
In the next articles we will discuss how a national pension fund could be established, how it should invest and what the challenges might be, but for now it is sufficient to say that such a fund would need to invest in ways which support the development of our productive economy and minimise the buying and selling of financial assets.
The investment decisions should be aligned with the economic priorities of a democratic Scottish government, which means that the fund should support Scotland’s industrial strategy and provide investment funds for strategically important sectors of the economy.
This means that the fund must be publicly accountable, a duty which pension funds do not currently have.
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Callum Baird, Editor of The National
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