The Scottish Government has published its proposals for the treatment of pensions if Scotland becomes independent following next year’s referendum. Here, we summarise at the key elements of the proposals and take a look at how the pensions industry has reacted.
The paper, entitled Pensions in an Independent Scotland, outlines the current pensions position across the UK as a whole and sets out the SNP’s vision for pensions in Scotland in the event of a Yes vote.
It begins by focusing on the perceived failings of successive UK governments in managing pension provision, followed by a consideration of the demographic and economic factors that differentiate Scotland from the wider United Kingdom and may justify a different approach.
The substance of the proposals can be placed under three broad headings: state pensions; private pensions; and the future regulation, taxation and protection of pensions generally.
Broadly, the key proposals are as follows:
1. State pensions
Current Pensions Unaffected
All current pensioners would continue to receive their current pension.
Single-tier pension
The Scottish Government would commit to the implementation of the single-tier pension at an initial rate of £160 per week (compared to an anticipated rate of £158.90 for the UK state pension).
Triple Lock
State pension increases would be “triple-locked” from 2016 until at least the end of the first term of an independent Scottish Government. This means they would increase by the highest of the average increase in earnings, CPI inflation or 2.5%. The UK Government has promised to apply the triple lock until 2015.
State pension age
The increase in state pension age to 66 would still apply, but an independent commission would be formed to consider whether further increases would be appropriate, given Scotland’s lower life expectancy than the UK as a whole.
2. Private pensions
Accrued benefits
Members’ accrued benefits would not be affected by independence.
Cross-border issues
Under EU cross-border rules, pensions schemes with members in more than one member state must be fully funded at all times, potentially leading to a sharp increase in pension costs for many employers, both in Scotland and in the rest of the UK. The Scottish Government would propose to negotiate transitional arrangements to alleviate the impact. This would require the agreement of the EU and the UK Government.
Auto-enrolment
The Scottish Government would adopt auto-enrolment and set up a Scottish alternative to NEST, which would be known as SEST.
3. Regulation, taxation and protection
Pensions legislation
The existing body of UK pensions legislation would be carried across to apply to Scottish pensions. Of course, any future amendments would be specific to either Scotland or the rest of the UK. Pensions taxation would initially remain the same, although this would be subject to any future changes to the tax system in an independent Scotland.
Pensions Regulator
A separate Scottish Pensions Regulator would be created to carry out the same functions as the Pensions Regulator.
Pension Protection Fund
The Scottish Government does not propose to set up a separate protection fund for Scottish pension schemes. Instead, Scottish schemes would continue to be eligible for admission to the existing Pension Protection Fund and would continue to pay levies. This is possible under EU law (a similar arrangement currently operates between Luxembourg and Germany) but would require the agreement of the UK Government.
Financial Services Compensation Scheme
The paper doesn’t fully commit to a position in respect of the Financial Services Compensation Scheme. It recognises the need to establish such a scheme, and “sees the merit” of maintaining a common scheme throughout the proposed Sterling zone, but states that alternative arrangements would be possible.
Industry reaction
The pensions industry has broadly welcomed the Scottish Government’s paper as a useful contribution to the debate over pensions and independence. However, many commentators have asked for further details of how the proposals would work in practice.
Martin Potter, chair of the Scottish Board of the Institute and Faculty of Actuaries, emphasised the importance of a public debate on pensions issues but commented that “further data will be needed to enable an evidence based analysis of the policy proposals that the public deserves and more detail on funding is needed in order that it may make an informed vote”.
ICAS, whose pensions paper in April raised a number of the issues addressed in the Scottish Government’s paper, also welcomed the further detail but urged the UK and Scottish Governments to begin discussions with the European Commission now, with a view to reaching a solution on the cross-border funding issue. However, the UK Government has indicated that it is not willing to enter such negotiations before the referendum has taken place.
With just under a year to go, pensions will no doubt remain a key feature of the independence debate over the coming months. To discuss the potential pensions issues arising from constitutional reform and how they might affect your organisation, please contact a member of our Pensions Group.