The Institute of Chartered Accountants of Scotland (ICAS) has published a useful introductory paper on pensions and constitutional change. This is an area of the constitutional debate that has been given little attention so far. We also need to get past the lurid media headlines on the report and the equally inadequate Scottish Government brush off. Difficult issues like pensions cannot be ducked – they are too important to all of us.
The paper poses questions covering the state pension, public service pensions and private pension schemes. It also recognises that Scotland only data is limited.
The state pension is paid from general taxation each year. There is no fund as you would have in a company pension scheme, so in pension terms this is called an unfunded scheme. With all the current focus on welfare reform, we should not forget that state pension payments total £82 billion, representing 40% of all social benefit payments and 13% of UK expenditure. There would need to be complex negotiations post independence to allocate liabilities given that the population is getting older. Data is limited and there is no UK, let alone Scottish, measure of accrued liabilities. There are also EU rules on pension payment therefore Scotland’s membership, or not, of the EU becomes an issue again.
Then we have public service pensions. The largest scheme in Scotland is the Local Government Pension Scheme (LGPS) that I am currently in the process of renegotiating. I don’t see any major independence issues here, as the Scottish scheme is already separate from the England and Wales scheme, has its own funds, regulations and is in good shape. Given the unwarranted interference in the scheme from Westminster, I would welcome some separation or complete devolution!
However, the other schemes (NHS, Teachers, Police etc) are unfunded in the language of the ICAS paper. I prefer the description ‘pay-as-you-go’, because they are funded each year by employee and employer contributions. This means that in any one year there can be a surplus or a deficit, but the balance is not retained. The UK Government calculates unfunded public sector pension liabilities at £893 billion and the Scottish Public Pensions Agency (SPPA) calculates Scottish unfunded liabilities at £66 billion. These are big scary numbers, but must be treated with caution. All public sector workers are not going to retire tomorrow and they will continue to pay contributions into the schemes. So long as governments at Scottish and UK level stop pushing them to opt out, through increased contributions and the 2016 National Insurance increases.
How you allocate past and future liabilities will be a very complex negotiation indeed. For example, the NHS scheme is currently in surplus each year, so if I was the Scottish Government negotiator I would be looking for some recognition of that. I would also want some credit for past employer contribution shortfalls. On the other hand, there are schemes currently in revenue deficit and those liabilities might pull in another direction. We should also remember that the cost of public service pensions is declining as a percentage of GDP. Changes to the schemes including RPI to CPI and later retirement ages will reduce costs further. The ICAS paper doesn’t really offer any solutions, but rightly calls on both governments to do some calculations. The Government Actuary Department (GAD) ought to be able to produce some numbers to better inform the debate.
Private pension schemes add another level of complexity. We have UK regulatory bodies the FCA and the PPF and new bodies would need to be established. Financial regulation (FCA) is relatively straightforward but pension protection (PPF) would require detailed negotiation and probably transitional arrangements.
If Scotland is in the EU then the IORP Directive provisions apply. This is supposed to stop cross-border pension deficits by ensuring schemes are fully funded. Many schemes are currently in deficit recovery mode over many years and would certainly not welcome having to plug that gap in one year. It could bury some companies. However, again we shouldn’t panic as there are ways around this, most obviously by splitting funds between English and Scottish members. Although this could be difficult for some schemes as the Scottish element might be too small to be viable.
Tax is another complexity identified in the ICAS paper. This is already being addressed by HMRC because of the tax varying powers in the Scotland Act 2012. These arrangements will also be useful should there be further fiscal devolution including all income tax as proposed in the recent Scottish Labour paper, and indeed in my own contribution to the Red Paper. There are further complications for those in Defined Contribution schemes that purchase an annuity. But again, these are not insurmountable.
There are few more important issues than security in retirement. This means pensions from all sources are hugely important and need serious consideration as part of the referendum debate. ICAS should be congratulated for this helpful contribution to the debate, once people get past the headlines and the Scottish Government response. The Treasury and the Scottish Government both need to do some serious and credible work to address this issue.