IN last week’s article, the Scottish Banking & Finance Group (SBFG) returned to the subject of pensions and the relationship between workplace and private pensions to the state pension.

We make no apology for our regular focus on pension funds. They are an under-recognised and powerful component of our financial system and have been operating under the radar for too long. It is time we all started discussing them, their role in the economy and how we need to reform how they work.

Since the introduction of “auto-enrolment pensions” in 2008, a majority of workers in Scotland and the rest of the UK now have savings in some form of pension fund.

While this has resulted in more people having another pension in addition to the state pension, it has sucked enormous amounts of money into the financial industry where it has benefited the pay and bonuses of a variety of players in financial markets and increased the volume of funds being used for financial speculation.

Instead of funds being used to invest in productive activity, what we have seen is more money ending up inflating a huge and unsustainable financial bubble.

Workplace and private funds are now worth £2.6 trillion. If we were to start again from scratch it is likely that we would not design a pension system so reliant on citizens’ savings. But we are where we are and £2.6trn of citizens’ savings cannot be ignored, abolished or confiscated.

If we want to provide a decent pension for all then we need to level up by ensuring every citizen can join a single national pension scheme, designed to provide a publicly agreed level of earnings related pension for every citizen when they retire.

The function of the state would be to make up any shortfall that individuals may suffer because, for one reason or another, they have not been able to contribute to the national fund for long enough to get the maximum benefit.

The role of the state would also be to act as the guarantor of the scheme in the unlikely event that there was a short-term cash flow problem.

A Scottish national fund will take some time to be established and it is likely that several phases of development will be necessary.

The start point might be to consolidate all the local government funds (LGPS) into one public-sector fund – at present this would have assets worth about £55 billion and would be about 25% of total Scottish citizens’ pension fund assets.

The current LGPS funds are themselves the product of earlier amalgamation of smaller funds so this process has been done successfully before.

Stage two could bring in the assets of other large funds, such as Scottish university funds, part of the UK wide University Superannuation Scheme – USS.

During these initial stages the rules governing how pension benefits are calculated would need to be harmonised, although the LGPS funds currently share a common formula for determining benefits.

The level of pension benefits compared to earnings is a matter for public debate but it is important that members of funds being transferred into a national fund suffer no detriment, so a principle of “equivalence” will be important when designing the rules. Once this initial large scheme has been formed and earnings-related pensions are created, there will be a strong incentive for members of other active pension schemes to transfer in voluntarily.

Any remaining defined benefit schemes offered by employers may wish to transfer in because doing so will relieve employers of the responsibility for funding deficits. Employees in defined contribution schemes would also want to seek to transfer their pension savings into the national fund in order to gain the benefit of a pension linked to their pre-retirement earnings, rather than one depending on how lucky they are with their personal investments.

Once the national fund has achieved a critical mass it will exert a “gravitational pull” on workplace and private pension schemes, given that it offers an earnings-related pension and the fund is also guaranteed by a Scottish state which has its own currency and central bank. The assets of this national fund would not belong to the state – it will be made up of the savings of citizens and so the assets will be owned collectively by all citizens once formation of the fund is fully completed.

The investments made by the fund would then be derived from citizens’ savings and the returns on those investments would flow back to the fund and help to provide the revenues needed to pay pension benefits. Everyone will contribute and everyone will benefit – the national pension fund would be a very large mutual financial institution. In this respect it would differ from the Norwegian Sovereign Wealth Fund (the “Oil Fund”) which is state-owned.