By Kenneth McNeil
Of all the contentious subjects in the referendum debate pensions is probably the one that causes the most confusion and is the most blighted by 'consumer ignorance'.
It is an area which at any time tends to cause maximum confusion and anxiety among the populace, particularly to those of us hoping to benefit in the near future.
It is a subject tailor-made for Unionist scaremongering tactics. The recent report by The Institute of Chartered Accountants of Scotland (ICAS) provided such an opportunity. The ICAS report is a wake up call rather than the kind of propaganda piece we often see from those institutions with a vested or political interest in the referendum.
Basically the report highlights that there is a lot of work to be done and negotiating to be concluded to provide a smooth transition for pension holders. None of it presents any insurmountable obstacles.
Inevitably the Unionists have seized on certain elements within that report and distorted the facts to present their standard 'we're all doomed' scenario.
I'll return to that presently but firstly I'd like to outline in simple terms the effect on different types of pension plans. It is important to establish what kind of pension or pensions you hold. Many people hold more than one kind of pension plan and often conflate information about one kind of pension with another.
I witnessed a stark example of that recently on one of the late night political programmes. One of the guests was a well known and eminent professor of economics. He was discussing the effect of EU regulations requiring full funding of cross border defined benefit pension schemes. He cited his own university scheme as an example.
He got it totally wrong. His university pension scheme is publicly funded and is completely unaffected by EU regulation which only applies to private schemes.
State Pension (Old Age Pension)
The state pension will be provided by the Scottish government rather than the UK government. This is a 'pay as you go' scheme. i.e. contributions working people pay in tax and National Insurance are used to pay for the pensions of those already retired. The UK government is not paying for these pensions, tax payers are. The UK is only administrating them.
Can Scotland afford to keep paying the state pension? Yes. Apart from the fact Scotland pays 9.9% of UK taxes for only 9.3% of the spending, it takes only 38% of Scottish tax revenues to pay for welfare benefits while the UK requires 42%.
Personal Pensions (PPP) are a contract between the individual and the pension company. They will not be affected by independence.
Government Public Sector Pensions
Teachers, firemen, local government employees etc. These are final salary, defined benefit schemes but not to be confused with final salary, defined benefit schemes in the private sector which I will cover later. These schemes are largely financed by local and national government and will continue to be financed in the same way they are just now.
Most are also administered in Scotland already. There will be a minority which are cross border agencies and these will require negotiation between iScotland and the rUK to split liabilities.
There are 3 main types.
GPP are treated in exactly the same way as PPP.
MPS like personal and GPP pensions are based on contributions. The employer and usually the employees as well, pay contributions which are then invested. The resulting investment pot is then used to buy the pension. The pension received therefore depends on the size of the pot and is not related to final salary. Again these schemes will be largely unaffected.
DB schemes. The employer and usually the employee as well will make contributions. The pension paid is based on the employees final salary and the length of their service. The prescribed pension benefits have to be paid. This is the kind of scheme which can run into trouble if there is not enough money to meet the promised benefits.
In practice the schemes only have to pay benefits to retired members and they are frequently underfunded. In other words they do not have enough cash to meet the pensions of those retired and those still to retire.
These are the kind of schemes mentioned in the ICAS report. They are subject to EU funding rules if they operate cross border i.e. the company has employees both in Scotland and the rest of the UK.
Gregg McClymont MP, Shadow Pensions Minister is at the forefront of unionist spin on this:-
"This is a huge issue since leaving the UK by definition creates a border between Scotland and rUK. In the pensions context the creation of this border has hair raising consequences."
"Companies would face a huge bill to absorb the extra Scottish pension costs created by separation".
Actually all applicable UK pensions would be affected meaning it would be much more of a headache in the rUK than Scotland.
The EU didn't envisage cross border schemes arising from countries becoming independent and it is unlikely that they would insist on schemes being fully funded overnight as this would bankrupt a lot of companies and throw the future pensioners onto the dole. Unlikely too that future iScotland and rUK governments would quietly acquiesce to such a situation.
As it happens this threat has now been lifted in any case. The provisions were contained in a bit of EU regulation known as Solvency 2. Since the ICAS report was published the EU has shelved the legislation. Probably not something you'll hear Mr McClymont and the Unionists shouting about.
So while there is a lot of administrative work to be done and negotiation on splitting liabilities in a number of pension arenas, the vast majority of pensioners and future pensioners will notice little difference in receiving their benefits.
What about administrating pensions in an independent Scotland and consumer protection?
Administration of both public schemes and private schemes will continue largely unaltered. The main change is likely to be seen in the State pension sector. Scotland could sub contract the work to the Dept. of Work & Pensions who do it just now but Scottish Government thinking points to the establishment of our own pensions office. While this may incur set up costs it also produces jobs, boosts the economy and saves on running costs.
What about protection? Let's hear from Mr McClymont again:-
"Nor have the SNP thought about the complex UK regulatory architecture which protects the pensions of Scots. The Financial Services Compensation Scheme (FSCS), the Pension Protection Fund (PPF) and The Pensions Regulator (TPR) together provide a UK wide firewall for Scots against the loss of pension savings. How much would it cost to withdraw Scots from this UK wide pensions architecture and how much would it cost a separate Scotland to then mimic the rUK pensions architecture? We have no answers from the SNP predictably."
The clear inference here is that the UK provides this protection and pays for it and that it would be costly for Scotland to provide such structures.
The FSCS, PPF and the TPR are bodies set up by legislation but they and the compensation funds are funded by the industry, not the UK government nor the taxpayer. As pointed out in the UCIS report these bodies could continue with Scottish input or Scotland could set up its own.
Again there is merit in having shared administration and regulation as companies would continue to trade across borders. Alternatively the Scottish government may wish to establish their own agencies for economic reasons. The potential saving in operating costs could be significant as these regulatory bodies invariably occupy some of London's most expensive real estate.
Pensions is yet another example of Unionist scare tactics. The reality is pensions will be more affordable and probably more efficiently run in an independent Scotland