Does independence put our pensions at risk? 

Many people ask and it's not unreasonable to do so, will their pensions be a risk in the case of independence for Scotland. We say that the question instead should be whether pensions are at risk now, whilst Scotland is still part of the UK? We researched the facts and we found the following:

The Truth

Pensioners are worse off in the UK than almost anywhere else in Europe. An independent Scotland can do better by respecting pensioners in a way the UK does not.

The Facts

• The UK has the worst state pension in the developed world- in 2016 it was only worth 29% of average income.
• The EU average is 70.5% meaning that UK pensions receive more than two times less than comparable countries.
• The only country to receive less is South Africa, where state pension equals 17.1% of average incomes. Considering that South Africa has the highest rates of inequality in the world and more than half the population is living in poverty, it is hardly a nation to benchmark against.
• The 2019 SNP Conference voted that in an independent Scotland the Scottish Government should plan to increase the Scottish state pension to the EU average effectively doubling it. However, we note that the plan has not yet been published. 
• The UK also has the largest pensions sector in the EU and pensioners receive half their income from private pension investments.
• In 2017, 17% of Scottish pensioners were in relative poverty compared with the EU average of 14%
• In Scotland, life expectancy is two years less than the UK average for men and one year less for women. The lifetime value of the state pension is around £10,000 lower for men and £11,000 lower for women in Scotland. This means people pay the same percentage of their wages into the national insurance fund but receive around £10,000 less from it.
• Under the current law, the SPA is due to increase to 68 between 2037 and 2039, having been brought forward by the 2014 Pension Act. This will mean that by 2040 the UK will have the oldest pensionable age in the OECD (compared to the average of 64.4 years old).
• The University of Stirling has noted that the uniform raising of the SPA will mean that: “as part of the UK, Scotland would implicitly be part of a pension contract that would be actuarially unfair.”
• According to the OECD women are the most likely to be in poverty in old age. Government legislation to speed up the equalisation the SPA has made this worse as around 300,000 women, known as WASPI women, born between December 1953 and October 1954 had to wait up to 18 extra months to receive their state pension. A further 2.6 million women were negatively affected by this acceleration.
• The UK pensions system is a pay-as-you-go system whereby national insurance contributions (NICs) paid by those in work one month pay the state pension the next month. The system relies on the working population being larger and contributing more than the amount of state pension that is taken out.
• Demographic shifts mean that by 2050, one in six people in the world will be over age 65 (16%), up from one in 11 in 2019 (9%). By 2050, one in four persons living in Europe and Northern America could be aged 65 or over whilst birth rates remain steady or in decline.

Conclusions

The UK’s pension system is fundamentally unfair for older people and pensions are far from safe by staying in the UK. The UK state pension system is failing older people and is unsustainable for future generations. It is inadequate to help pensioners live a life free from worrying about financial security.

In addition to all the above, a motion was passed at the SNP Conference (2019) calling for a commission to look into increasing the State Pension in an Independent Scotland to the same level as the OECD average and supporting the commissioning of a Scottish State Pension Plan. We will provide a link to that plan here when it is published. 

Update
Following the publication of our first Pensions FAQ (above) in January we received some more detailed questions on pensions and we are happy to answer them here. Firstly

Q 1) A major problem for me in 2014 was that I wasn’t sure if my existing pension could be put at risk by independence. The question which must be answered properly is - how will my existing UK state pension be guaranteed after independence?

Q 2) State pensions. I paid 40+years contribution to the DWP. After Independence who would pay our pensions, DWP or Scotland?

Q 3) Will an independent Scotland be able to pay the average EU pension (as % of the average wage) that the SNP has set as a goal?

We know that the question of pensions in an independent Scotland is an issue for many people, particularly those already in receipt of a state pension. It could be said that this issue played a decisive role in deciding the 2014 independence referendum, largely as the Better Together campaign regularly spread fear amongst older people about the potential risk from independence that just was not borne out by the facts of the matter. So, it is important to make sure people have the answers to their pensions questions this time, thus eliminating any room for doubt.

On page 20 of the report about pensions in an independent Scotland published by the Scottish Government in 2013 it 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.

For those in Scotland in receipt of the UK State Pension at the time of independence, the responsibility for paying that pension would transfer to the Scottish 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 prior to independence would become their Scottish State Pension entitlement.

There is also the statement by the then UK Minister of pensions, Steve Webb, who told ‘a Westminster committee those who had "accumulated rights" would be entitled to the money.’ In particular, in answering the question of pensions if Scotland had voted for independence, Mr Webb said:

"Yes, they have accumulated rights into the UK system, under the UK system's rules.”

He added that the money would be paid out at the pension age decided by the UK government, rather than any future Scottish government. He said: "Take a Scottish person who 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 in when they were part of the United Kingdom.”

Asked whether citizenship would matter, Mr Webb told MPs: "Citizenship is irrelevant. It is what you have put into the UK National Insurance system prior to separation. Answer [for example] 35 years, that builds up to a continued UK pension under continuing UK rules. They are entitled to that money. The question is, who is paying for it, and how is that [cost] split?"

Meanwhile, there is also the case of the Department for Work and Pension (DWP) response to the same question, known also as the ‘DWP letter.’ According to the initial response to the question, a letter which is now notoriously difficult to find online, at least in good quality, ‘the UK state pension would continue to be paid to people living in an independent Scotland.’ In particular, according to an article about the issue on the BBC’s website, the letter, written in the name of a pension customer service advisor on 4th January 2013, stated:

"If Scotland does become independent, this will have no effect on your state pension - you will continue to receive it just as you do at present."

As the same article adds, ‘in a subsequent statement, a DWP spokesman said’:

"We will look into this specific letter in case any misleading information was inadvertently given out.

"However, what is absolutely clear is that it will be the responsibility of an independent Scottish government, not the UK government, to make arrangement for pensions for citizens of an independent Scotland.

"There can be no guarantee that it will be at the same level as it is now."

This response from the DWP clearly aims to create unnecessary ambiguity, which will be cleared up later in this post. However, this response by the DWP also raises the other important issue that needs clarification; the level of pensions in an independent Scotland. The state pension might not be at the same level as it is now - it could be higher.

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 pensioner’s.’ 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 £200.00 per week per pensioner. To be clear, the UK pension is currently the lowest in the EU, as referenced earlier in this article.

The Scottish Government have been unequivocal that people in Scotland will be entitled to a state pension if they meet the current minimum criteria for it. The minimum qualifying accruement for the new state pension is 10 years, although in order to get the full state pension 35 years of NICs are required. After independence, entitlement would continue to be built up in Scotland towards a Scottish state pension. This is similar to how state pension entitlement is transferred across EEA countries.

This would be paid for either by the UK government or by the Scottish government, subject to pre-independence negotiations. It is plausible that the Scottish government would inherit the full pension liability as part of the negotiation. 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 and rates maintained.

Such an arrangement would be in the interests of both parties - it would allow the UK government to be freed of having to pay pensions across borders, saving bureaucracy, and the Scottish government to provide a 100% assurance that rates would be maintained or increased. This solution would be good for the people of Scotland who have already accrued a portion of a UK pension through NICs, as they would only eventually want to receive their pension from one government.

For now, the cost of providing a pension in Scotland is around 6-8% cheaper than in the rUK because of lower life expectancy. Furthermore, the Sustainable Growth Commission’s (SGC) figures suggest that 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.

In addition, as we have already 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 discussed in our website and publications, would make it possible to afford a state pension at the OECD average level.

The infrastructure to deliver pensions is already in place. The Pension Centres, which are currently part of the Department for Work and Pensions (DWP), will continue to administer and manage state pensions. These are based in Motherwell and Dundee. The SGC estimates that public sector employment in an independent Scotland would increase by 1%, with 100 extra staff being required in social security and pensions at a cost of £25m. However, they would also generate additional tax revenues of £1.5m, as well as immeasurable benefits from increased personal spending.

To be clear, the cost of pensions to an independent Scottish Government would be the same or lower than they are right now unless the Scottish Government decided to increase the amount to a higher level than they are as part of the UK. There are no significant additional pensions costs to the Scottish Government associated with independence.

An indication of how a state pension system would operate across borders after Scottish independence can be seen in current pensions practices. It is a fact that state pension entitlement is based upon accruing sufficient NICs over a person’s working life. This is built up regardless of the nationality of the person working, or the country of residence. In 2012, the UK government paid state pension to 1.2m people living outside the UK.

This would happen in an independent Scotland. According to the National Institute for Economic Review, cross-border state pension liabilities would be relatively small if Scotland decides to become independent.

When it comes to raising state pensions to the OECD-average level, it is certainly encouraging that the SNP, as the pro-independence party and the one currently in government in Scotland, is making plans to make this happen. This though may not happen instantaneously. It would be logical to forecast that pensions in an independent Scotland would gradually reach the OECD-average level over time.

To summarise, the UK government has a legal obligation to pay pensions to all those who have paid into the system via their National Insurance Contributions during their working life. The UK government would therefore continue to pay pensions as normal, whether pensioners lived in an independent Scotland, France, Spain, or in any other country. To get out of that obligation, the UK government could choose to make a capital payment to the Scottish Government as part of the independence negotiations. In that case the Scottish Government would take on the responsibility to pay UK pensions to pensioners living in Scotland.

If you have any more questions about pensions in an independent Scotland please submit them on the FAQ for to the right of this blog.