Lessons for Scotland in how newly independent countries boosted pensions

New analysis shows that UK state pensions are the least generous in North West Europe in comparison to the average wage. The analysis from the House of Commons library shows pensions in the UK are the lowest of our European neighbours as a proportion of pre-retirement wages.

UK pensioners receive around a quarter of the average working wage. In comparison pensioners in Luxembourg and Austria receive 90%.

A recent Believe in Scotland billboard campaign highlighted the fact that UK pensions are the lowest in the developed world as a percentage of final earnings.

Pensions, of course, have been one of the main areas of concern for those still considering whether to vote for independence. So how would an independent Scotland handle its pensions system and how successful is that system likely to be?  One way to understand how pensions might be affected is to consider the way in which they have been handled and developed within newly independent countries.

This article will examine a number of newly independent country case studies, including the countries that formed after the collapse of the Soviet Union and Yugoslavia.


Many of the independent countries that have formed since 1990 were previously part of the Soviet Union. It is important to understand how the pension scheme operated before the Soviet Union collapsed. Four main stages contributed to the development of the pension security system in the USSR:

1) 1918 to 1920s: Introduction of the first Soviet Union social security programmes.
2) 1930 to early 1950s: Formation of the basic features of the social security system.
3) 1956 to mid-1960s: Pension reform.
4) 1970 to 1980s: Minor modifications to the existing system.

With reference to the third stage, a new law concerning state pensions was passed in 1956. This reform extended the coverage of the pension system, increased the benefit amount and reduced the gap between the minimum and maximum pension. On average, old-age pensions rose 100%, invalidity pensions 50% and survivors’ pensions 64%. The largest increases were felt among low-paid workers.

Old-age pensions in the USSR were based on past earnings (recent earnings, rather than lifetime earnings). The basic pension rate depended on the category of work and the level of earnings in the Soviet Union. For example, in 1973 the percentage of current average wage paid in old-age pension - based on current average earnings and 35 years of employment in ordinary conditions - was 55% for a single pensioner and 61% for a pensioner with one dependent.


Russian Federation

After the dissolution of the USSR and throughout the early 1990s, the Russian Federation state pension system was similar to the Soviet Union’s system and its general qualifying conditions. However, the law on state pensions in the Russian Federation in 1990 was the first step in changing Russia’s system and instigated the formation of a new type of pension system, fully independent from the state budget of the USSR.

Article 1 of the law stated that labour and its results were the main criterion for differentiated terms and norms in the pension system. As a result only two forms of pensions - labour and social - were created to replace the former multifaceted and multilevel pension system.

The modernisation of the social security system and improved living standards of the most disadvantaged citizens became the fundamental objective of social reforms held by the Russian Federation government

Under this law a new financial institution, the Pension Fund of the Russian Federation (PFR), was also founded to finance pension benefits through insurance contributions, as well as allocations from the state budget. The system is financed from contributions paid by insured persons and employers. The insured individuals pay 1% of their earnings and the employer pays 28% of the payroll. The PFR managed to stabilise the pension system, despite difficult circumstances. Moreover, the number of Russian pensioners grew, as creative workers, clerics, sole proprietors and other working groups who had previously not been included in the national pension system now met the qualifying conditions.

The modernisation of the social security system and improved living standards of the most disadvantaged citizens became the fundamental objective of social reforms held by the government with the direct participation of the Pension Fund of Russia.


After its independence from the USSR Latvia started to reform its pension system. This involved an initial reform in 1990. The reformed system retained much of the Soviet pension system qualifying conditions for years after independence.

Latvia currently operates a three-pillar pension system. The first pillar is a Pay as You Go (PAYG), notional defined contribution (NDC) system, the second is a funded mandatory pillar and the third pillar consists of private voluntary occupational and individual pension arrangements.

In this article we will focus on public pensions - the first pillar. Reform of the first pillar took place in 1996 due to low retirement ages, widespread early retirement, the evasion of social security contribution and demographic change. The new system created a strong link between contributions and benefits. Indeed, NDC pension systems offer participants a hypothetical account in which all the contributions that are made throughout their working life are held. At the time of retirement, benefits are calculated by dividing the amount accumulated in the account by the cohort life expectancy.

The new Latvian system has been considered radical and hugely successful. It offers something for all key stakeholders: it exposes what is normally hidden in a traditional pension system, revealing the cost of providing guarantees and benefits. It is flexible and adjusts to demographic and economic changes. This highlights that while the transition of the pensions system may be gradual after independence, it can also be hugely successful.


The pensions system in Yugoslavia was based on the PAYG model, in which investment, level of earnings and the duration of insurance determines the benefits of the pension. Since the collapse of Yugoslavia, the countries that constituted this region adopted similar systems.


Here the PAYG system was in place until 1998. However, it was clear that it was unable to deal with shocks due to low retirement age, a weak link between contributions and benefits, and the overly generous benefits. As a result, major pension reforms were initiated in a gradual, step-by-step manner. The Croatian government implemented reforms of the PAYG system in 1999 and introduced mandatory and voluntary pension funds in 2002.

The 1999 reform was the first step towards introducing a three-pillar system. That year Croatia reformed public pensions and set out to achieve financial sustainability and cost containment. By 2009 retirement age had gradually been increased, reaching 65 for men and 60 for women. The minimum early retirement age was also raised and the benefit deductions for early retirement were increased.

While the pension system may not suddenly change when a country becomes independent ... changes are possible and have brought great successes for many newly independent countries


Slovenia also inherited the legislation of its pension system from the former Yugoslavia and soon after independence initiated its transformation from worker self-management to a modern market economy.  Slovenia conducted relatively mild reforms and preserved the old pensions insurance system in which pensions are dependent on earnings and contributions. Indeed, the first pillar of Slovenia’s pension system is based on the PAYG model. Certain significant reforms were established after 2000, including raised age limits and maximum pension restrictions. Slovenia is now one of the richest Central and Eastern European countries and its pension system is very similar to Western European countries.

Across all of these examples, it has been clear that while the pension system may not suddenly change when a country becomes independent, and aspects of its former system may be retained, changes are possible and have brought great successes for many newly independent countries.

Net pension replacement rates

It is interesting to consider the net pension replacement rates in these newly independent countries to see exactly how successful the reforms and pension systems have been. To offer a comparison, we have included the net pension replacement rate of the UK.


Net Pension Replacement Rate











This table clearly highlights a significant difference between the net pension replacement rate of these newly independent countries and the UK. This suggests that the various reforms and new pension systems have benefitted the citizens of these countries.


To conclude, these country case studies have demonstrated that change in pension systems is not always immediate after a country becomes independent and aspects of the former pension scheme may be continued. However, it has also been clear that positive changes and reforms are possible and have benefitted these newly independent countries and their aged population. Therefore, it appears likely that an independent Scotland would manage public pensions successfully and, similarly to other independent countries and would be able to raise the net pension replacement rate to one more aligned to thr rest of Europe.

By Richard Walker