Many people have asked us what impact independence is likely to have on their existing pension schemes and investments. In another post which you can read here, we have covered the state pension situation after independence. In that post, we have pointed out that:
- 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 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.
With regard to private pensions, we researched the facts and we found the following:
Occupational pensions will not be affected by independence. Private pension assets will be protected by existing legislation after independence. These include personal pensions, cash ISAs, lifetime ISAs and private investments without a fund to administer them. You will still be able to purchase bonds and tax-free savings but the Scottish Government, and not the Westminster, will be responsible for those bonds and making contributions.
- Each occupational pensions scheme establishes the conditions that govern the operation and that the company has to fulfil regardless of political circumstances, in advance. If you are due an occupational pension you will get your full pension entitlement in an independent Scotland as your contract with the pension supplier will still stand.
- In the case of final salary pensions, also known as defined benefit schemes, a fund is obliged to pay you the amount that was agreed in advance. The only occasions in which this has not happened has been when the firm has gone into liquidation, in which case there are adequate industry protections to guarantee your investment.
- The ultimate backstop is the Pension Protection Fund (PPF), which protects the entire pension of those who have already retired and 90% of those who are still working. This is subject to an annual cap of £38,505.61.
- All protections that exist as part of the UK will also be in place in an independent Scotland.
Private Pension Assets
- Currently, private pension assets are mainly held in banks and other institutions which operate cross-nationally. For instance, the largest banks in Scotland are; Royal Bank of Scotland (owned by the UK Government), the Bank of Scotland (owned by Lloyds group) and Clydesdale (owned by an Australian banking group). These, and other banks, are all covered under UK regulatory frameworks because they are either headquartered in the UK or have subsidiaries there. Following independence, those companies will simply designate their offices in Scotland and England as their registered office for that nation and work under the pension laws of that nation. Your pension will be registered with the bank/pension provider in the nation in which you live.
- The position expressed by the Scottish Government is that tax-free savings products, such as private pension savings, will be supported and honoured in full after independence. These savings products will also be protected by compensation schemes, providing protection in line with European harmonised rules of consumer protection.
- Scottish based savers will be Scottish residents and therefore no longer UK residents when it comes to tax-free savings and so will have access to tax-free savings schemes operated by the Scottish Government. Savers will be able to keep existing UK savings without paying tax on them but will not be able to contribute additionally to those specific UK funds. This is because the UK government pays towards these schemes and new schemes towards which the Scottish Government will contribute will be put in place.
- National Savings and Investment bonds will also be treated the same way. Scottish based investors will not be able to invest additional money in UK bonds but will be guaranteed their returns on existing investments and allowed to keep their NSI open. These private investments will continue to enjoy 100% security. At a government level, such financial assets will be divided between the two nations upon independence. The Scottish Government will have its own bonds and savings products that people will be able to invest in.
- In the event of an independent Scotland launching its own currency, your private pension will be paid in the Scottish currency, it is likely that the Scottish currency will be pegged to the pound sterling. However, in the case of currency fluctuations, the policy under development from the Scottish Government is that the value of your currency will be protected and that there will be no detriment due to currency fluctuations. The full economic prospectus for independence will be produced prior to a new referendum campaign and we will link the relevant commitment to this page to confirm that arrangement.
The question is not so much whether occupational pensions and private pension assets are protected as it would be fair to say that this is a certainty. The question, thus, is: how are they going to be protected? What would be the arrangement or policies put in place by the Scottish Government that would ensure this protection?
It is likely that a deal would be reached in which the Scottish Government would accept the full liability for pensions, in order to guarantee their value and for continuity. That is in Westminster’s interests as well, as they would be required to honour these commitments anyway. It would also provide a guarantee for people from the rest of the UK that are living and saving in Scotland.
The Institute of Faculty and Actuaries has proposed a number of regulatory options for Scotland after independence, each with different trade-offs and benefits. An agreement with existing UK bodies could be reached, with the benefit of continuity, coverage and cost-effectiveness. However, this would limit the Scottish Government’s ability to tailor the insurance market and would require negotiations.
A likelier solution would be to create new equivalent Scottish regulatory bodies, which would likely be funded by a proportionate industry levy (as is currently the case for the UK bodies). This would offer flexibility and the capability of changing regulation.
The Scottish Government’s stated policy is to give priority to reaching a single agreement for the joint regulation of occupational pensions, which would minimise disruption, yet offer little flexibility. The rules and practices of the UK Pension Regulator will also be adopted. The government would also establish a Scottish equivalent to NEST, providing both continuity for those already investing and giving the Scottish Government greater control over future contribution rates.
The second-choice option is to establish a Scottish pension regulatory and pension protection scheme to achieve regulatory alignment for occupational pensions, as well as private pension assets.