Scotland politics

At-a-glance: Report on pensions in an independent Scotland

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The National Institute of Economic and Social Research (NIESR) has published a wide-ranging economic review of the case for Scottish independence.

In a paper entitled Funding pensions in Scotland: Would independence matter?, authors David Bell, David Comerford and David Eiserand compare the overall costs of providing pensions in an independent Scotland against the resources that are available to cover these costs.

They say the costs of funding pensions in an independent Scotland would be influenced by mortality risks, the costs of borrowing and the segmentation of costs and risks (ie pricing to Scotland's experience rather than pooled across UK experience).

The paper says:

  • An independent Scotland could delay by 12 years the rise in the UK state pension age to 67.
  • The UK government plans to increase the state pension age to 66 by 2020, and then to increase it further to 67 between 2026 and 2028. However, with different life expectancies in different locations, increases in the state pension age could affect Scotland but be caused by increases in life expectancy in the South of England. As part of the UK, Scotland would implicitly be part of a pension contract that would be actuarially unfair if Scotland was a separate state.
  • Pensions are cheaper in Scotland than the UK because Scots, on average, have shorter lives than people in the rest of the UK.
  • At present richer parts of the UK are subsidising pensions in poorer parts of the UK, including Scotland.
  • One of the policies to which the Scottish government has committed is the maintenance of the so-called 'triplelock' in state pensions after independence. This ensures that the state pension will increase by the maximum of 2.5%, the rate of growth of earnings, or the rate of growth of prices. This is a strong commitment which will eventually be unaffordable.
  • A state pension age of 66, rather than 65, in 2020 represents a transfer from Scotland to the rest of the UK of nearly £50m per annum.
  • An independent Scotland would almost certainly have higher interest rates which would mean a higher burden on taxpayers to the advantage of pensioners.
  • An independent Scottish government would have to create a bond market for public debt.
  • The Scottish Public Pensions Agency (SPPA) has indicated that contribution rates for the largest unfunded schemes (teachers and NHS) may need to increase by 2% to 4% of pay.
  • If Scotland became independent and its public sector increased in size relative to the rest of the UK, then maintaining the solvency of pay-as-you-go public sector pensions would be easier since there would be more contributing public sector employees. However, the Scottish taxpayer would have to meet the additional costs of its larger public sector.
  • Current annuity holders in Scotland have very little to concern themselves with, with regard to Scottish independence. Their annuities will be backed by UK government debt and so they are guaranteed their income in sterling.

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