With so many voters still having questions about pensions we put some of your queries to one of Scotland’s experts.
David Davison is a director of Spence and Partners, a leading actuarial practice. He also sits on the Pensions Committee at the Institute of Chartered Accountants Scotland (ICAS). ICAS, which has remained neutral in the independence debate, has been responsible for two papers on pensions widely considered to provide the most detailed analysis of the pensions issues to date.
What will be the retirement age in an independent Scotland?
The State Pension Age is due to rise to 66 by 2020, 67 by 2028 and 68 by 2046 as proposed by the existing UK timetable. In the event of independence the Scottish Government has committed to establishing an independent Commission in the first two years of independence to review of the State Pension Age and has suggested the possibility of postponing the changes to 67 and beyond based upon lower current Scottish life expectancy. It is widely accepted that Scotland is projected to have a higher ratio of pensioners to those of working age than in the rUK. As State Pensions are funded out from general taxation, the higher ratio of pensioners to those of working age would make the funding of State Pensions more difficult, all else being equal.
How would the value/payment of pensions be affected by a change of currency?
Perhaps the hottest debating point of the campaign will be whether or not an independent Scotland will retain the £. The question assumes a change of currency, so let us make that assumption. In the event that there was a change of currency, there are two likely ways in which things would move forward. Firstly, if the Scottish currency wished to and was able to maintain a fixed rate of exchange with the £, then we may see little overall effect in value terms.
If the Scottish currency was allowed to fluctuate in value relative to the £ (in the same way as the £ currently does against the $, € etc) then payments would be subject to exchange rate movements which would mean that the value of the Scottish currency would become higher or lower than the £ (relative to the initial exchange rate). As such, any future payments you receive in £ would be worth more or less in Scottish currency terms dependent on the exchange rate when you receive the payments. Under both scenarios, any transactions between the Scottish currency and the £ would be likely to be subject to currency exchange rate charges.
Can the state pension be guaranteed in an independent Scotland and will it be the same amount?
The Pensions Paper and Guide issued by the Scottish Government stated how State pensions would be accrued and paid in an independent Scotland and the transitional arrangements to be adopted. The Scottish Government has stated that, in an independent Scotland:
current pensioners will continue to receive their pensions as now, on time and in full and that accrued rights would be protected; and
planned reforms will be rolled out from 2016 as per rUK, including the introduction of the single tier pension.
The Scottish Government has stated that a “triple lock” would be adopted for the first term of an independent parliament which would protect the value of the State Pension (and single tier pension and guarantee credit) over time against prices or earnings, with a minimum annual increase of 2.5%.
The new single tier pension would be introduced, as currently planned by the UK Government, in April 2016. This would be paid in full for those with 35 qualifying years of NI contributions. The Scottish Government has suggested that the single tier pension would be slightly higher than that proposed for the UK although at this stage it is unclear how affordable this might be longer term. State pensions are paid from general taxation and therefore its future level beyond the first term of Parliament will be based upon available resources and Government priorities.
I paid taxes to a UK Government all of my working life, who will pick up the bill for my state pension in an independent Scotland?
State pension payments are made from general taxation year in year out. There is no funding reserve build up over time to pay future pensions. Responsibility for the “accrued” entitlement of those of working age living in Scotland to a state pension and the practicalities of making payments to those who are currently retired would be a major feature of any formal negotiations between the Scottish Government and the UK Government.
The Scottish Government has committed to paying state pensions in full and on time but the actual details of how this will be achieved is uncertain at this point. Transitional arrangements would be needed to agreed to migrate responsibility for the payment of the State pension to pensioners living in Scotland at the date of independence and to define ‘living in Scotland at the date of independence’ or ‘country of residence at the date of independence’ for the purpose of determining entitlement to a Scottish State pension?
My old works pension is now paid by the Pension Protection Fund, Darlington. When I enquired recently if in the result of a yes vote in the forth coming referendum, would they still be paying my pension, the reply was they just did not know. Can you throw any light on this matter?
It is to be expected that members of schemes that have already transferred to the PPF will remain in either a combined arrangement or an agreed separate Scottish arrangement. This is because it is difficult to envisage how an rUK PPF could “jettison” members who transferred into the PPF under the existing set up. A potential complexity for existing members would be in relation to any currency issues which arise in the event of a “Yes” vote. It is less clear how those who are currently eligible for PPF entry would be placed post independence. The Scottish Government have made proposals which would seek to share the Pension Protection Fund (‘PPF’) with rUK post independence. Such an arrangement would need to be agreed as part of any overall settlement.
What about civil servants who have worked for both the UK and Scottish Governments?
The Scottish Government Guide confirms that all public service pension rights and entitlements which have been accrued will be fully protected and accessible, and that the Scottish Public Pensions Agency will deliver public sector pensions in an independent Scotland. The Pensions Paper states that the Scottish Government would take on the responsibility for the pensions of active, deferred and pensioner members of unfunded schemes, including members of UK-wide unfunded pension schemes living in Scotland. It also confirms that the responsibility to take on these unfunded liabilities would be a feature of future negotiations with the UK. The Scottish Government commits in the Guide to providing a fair, affordable and sustainable pension and reward package for public sector employees. The affordability (and therefore the sustainability) of public sector pensions remains a long-term matter, which will need to be managed in the light of changing demographics and other demands on public funds.
I am entitled to the Government Retirement Pension and I have a small NHS pension of £29 per week. What will happen to these pensions? Am I still going to receive the full amount of Retirement Pension which is £133.03 per week which includes Graduated Pension? As I am receiving Pension Credit to supplement, will I still be receiving this as well?
The Scottish Government has committed to paying all state pensions in full and on time and to maintaining other state benefits so it is expected that all you benefits will remain as currently (assuming no currency related impact).
I have a pension from a former nationalised industry paid through a company based in England and pay income tax on it. In the event of independence will I be taxed in England, Scotland or both? James Wishart
You would be taxed in the country of residence so if you were living in Scotland you would be taxed based upon whatever the tax rate was in Scotland which may be higher or lower than that in rUK. As your situation would involve funds being paid from England to Scotland, it would potentially be impacted by any currency changes which arise post independence.
Will the auto enrolment scheme continue if there is a yes vote and if so do you forsee any issues with this for an independent Scotland?
The Scottish Government is also committed to auto-enrolment and has confirmed that SEST (Scottish Employment Savings Trust) would replace NEST in Scotland. It is unclear at this stage what the likely set up costs of establishing SEST would be and if the terms would be comparable with NEST given the lower potential population of members. It is also at this stage unclear how any accumulated contributions of Scottish members of NEST might be transferred into SEST (or ultimately from SEST to NEST), given that NEST is unable to operate cross border.
The Scottish Government argues that it can negotiate a deal to delay the EU requirement for all cross-border pension schemes to be fully-funded, do you think this is achievable? What would happen to a private pension if it is part of a fund which runs a deficit?
If Scotland became an independent country there would be significant cross-border issues for schemes which currently operate UK-wide. This is an issue for the UK Government as much as for the Scottish Government. Under EU law (as interpreted by UK legislation), schemes which operate in more than one member State must fund their liabilities in full and any underfunding must be rectified immediately rather than paying off any deficit over time. Dealing with underfunding would have major cost and cash flow implications for employers with underfunded cross-border schemes.
It is stated in the Pensions Guide that arrangements would be agreed which provide the necessary flexibility for employers, while ensuring that members and beneficiaries are protected. The three year transitional grace period mentioned a number of times in the Paper is likely to be insufficient for many schemes which are currently funding their deficits over much longer periods (10 years +).
Subsequent to a vote for independence in September 2014, it is likely that these discussions would become part of the more fundamental issue of Scotland’s membership of the EU generally and therefore any clarity on this issue likely to be some way off.
What will happen to all the pension industry jobs in Scotland?
Clearly, an independent Scotland would continue to have a “pensions industry” in some form. To estimate the impact of independence on the precise number of jobs (up or down) from the current position would be entirely speculative at this time.
Will pensions be protected and regulated in the same way as they are now?
The Scottish Government Pension Guide sets out a number of proposals, including:
A rolling over of UK law for an interim period;
Close alignment of the structure and activities of the regulatory framework with rUK;
A continuation of the roll-out of automatic enrolment; and
The creation of a Scottish equivalent of NEST (the National Employment Savings Trust).
The establishment of a Scottish Pensions Regulator is proposed and it would work with the rUK Pensions Regulator and the (UK) Financial Conduct Authority. It is also proposed that the current pension protection arrangements would continue, with the existing (UK) Pension Protection Fund continuing to cover Scottish schemes, and with Scottish schemes continuing to pay PPF levies.
Whilst an ideal solution from a Scottish perspective it remains unclear how jointly participating in a UK wide PPF would work in practice given the extent of risk sharing required and that the different governments may have differing policy objectives.
Most of the money that comes to me has been taxed at source. Pensions, other than National Insurance, are taxed by means of an Inland Revenue Tax Code. This makes my tax return fairly simple. How will this work in the event of a Yes vote? Elizabeth Cosgrove
The relief at source rules have recently been extended until April 2018 and are likely to be carried on consistently by a Scottish Government post independence. Any changes to income tax would only be applicable after April 2016 so the process would remain the same until that point and likely to be consistent at least until 2018 and probably beyond.