Pensions in an independent Scotland: it's complicated

The SNP’s Westminster leader Ian Blackford threw the cat among the pigeons last month when he said the UK Government would have to continue paying the state pension to people living in Scotland in the event of independence. Though we’ve been here before – in the run up the 2014 independence referedum – his comment led to much heated debate that hasn’t so much come up with any satisfactory answers as reveal how little people know about what the state pension is or how it operates.

In one sense the issue of what would happen if Scotland voted to leave the UK should be easy to work out because of the way the state pension is structured. Unlike final salary workplace pensions, which are funded through large funds that have accumulated over time, the state pension is not backed by any kind of pot. People build up the right to receive a pension by paying national insurance contributions over a specific period of time, but that money is not set aside to grow on their behalf – current year contributions pay the pensions due to others in that specific year.

“The state pension is much more like a standard benefit – it’s paid through this year’s tax contributions and borrowing rather than through historic accumulation,” explains David Eiser, a senior knowledge exchange fellow at the University of Strathclyde’s Fraser of Allander Institute.

“As an individual you have no right to the contributions you have made in the past and the government has no pension pot either. National Insurance is better thought of as any other tax really – it raises revenue and the government spends it in the current year.”

Independent pensions consultant John Ralfe believes that makes answering the question of what would happen to the state pension in an independent Scotland simple.

“The state pension is just a benefit like Universal Credit so you would end up saying at the point at which Scotland became independent. Old age pensioners in Scotland would receive their pension from the Scottish state and the Scottish state could change them and make them more or less generous,” he says.

“That would be the beginning and end of it, it’s very straightforward. An independent Scotland would pay old age pensions in exactly the same way it would pay any other benefits.”

The pensions issue has raised its head again following a statement from the SNP's Westminster leader Ian Blackford

While that would appear to be the only reasonable way to deal with future entitlements, campaigner and life peer Baroness Ros Altmann, who served as pensions minister in David Cameron’s government, is less convinced that is how entitlement earned in the past would be dealt with – not least because the country someone goes on to live in does not currently have any bearing on the entitlements they accrued while living in the UK. Just as any foreign national who has paid taxes for long enough has the right to receive a pension from the UK state, so too would any qualifying Scottish national.

“This is a very complex issue, but I cannot see how the UK Government could refuse to pay people the pensions they have accrued with their UK national insurance contributions over the years,” she says.

“Obviously, there would be complex negotiations to try to untangle past records, but I truly cannot see how anyone would know how many years someone paid in when living in Scotland versus the rest of the UK, how to apportion the National Insurance contribution record to different years, and all the other unbelievably complicated calculations that would be required.”

For Patrick Ring, of the Glasgow School for Business and Society at Glasgow Caledonian University, the key thing to recognise at this point in time is that both positions could be right but, equally, both could be wrong. Scottish taxpayers leaving the UK en masse would create an enormous headache the UK Government would likely want to negotiate away but, as it would want reciprocal agreements in place for people moving from Scotland to England post-independence, some form of compromise will have to be reached. Unless and until a separation agreement is negotiated, it will be impossible to tell what the ultimate outcome will be.

“As the state pension is pay as you go, National Insurance contributions paid in the current year are used to pay benefits due in the current year,” Ring says. “On that basis some might argue that once an independent Scotland is responsible for tax, it’s responsible for paying pensions for its citizens. On the other hand, you might argue that as the year-on-year entitlement has been accrued as a UK citizen, it should be payable by the UK. Both of these positions can be argued for and against, but I don’t think either necessarily holds absolute sway over the other.”

Pensions, it is clear, are complicated so it is no wonder there is so much confusion around how they might be dealt with in the event that Scotland breaks away from the rest of the UK – especially as the party hoping to lead that charge seems muddled on the issue itself. In the days that followed Blackford’s comments about the state pension, First Minister Nicola Sturgeon was asked to clarify the SNP’s position. Though she said she accepted that “on an ongoing basis it will be for the Scottish Government to fund Scottish pensions”, she also said that how the “historic assets and liabilities” would be split would be a matter for negotiation between Scotland and the UK. 

The state pension is much more like a standard benefit – it’s paid through this year’s tax contributions and borrowing rather than through historic accumulation

Given the pay-as-you-go way in which the state pension operates, it makes no sense to talk of assets because there are no assets to fight over or divide. It is also somewhat misleading to talk about liabilities – yes, people earn the right to receive a pension through paying National Insurance, but that does not mean future liabilities are set because there is no right for anyone to receive a guaranteed sum starting at a guaranteed point in time. As with any other state benefit, the government can increase, freeze or decrease the state pension and, as has been seen in recent years, can change the age at which it becomes payable to suit its own budgetary requirements.

“The government can change the pension,” Eiser says. “There have been periods in the past – such as the 1980s – when the value of the state pension eroded quite substantially over a period of time. People get irate about changes to the state pension age and that is the same kind of issue, but none of this is set in stone and it’s not based on entitlements.”

It is possible that when speaking about assets and liabilities Sturgeon was referring to public sector pensions, which are governed by Westminster legislation and part-funded by Barnett consequentials. However, even then the statement would not make total sense because most of the public sector schemes also operate on a pay-as-you-go basis. There are schemes for NHS employees, teachers, police and firefighters – each of which have separate Scottish sections managed by the Scottish Public Pensions Agency – but, despite staff making contributions to earn their entitlement, none are backed by funds that would have to be split. The Local Government Pension Scheme, on the other hand, is backed by investments and there are 11 underlying Scottish funds that correspond to the old regional council model.

Neither set-up means working out what to do with these schemes in the event of independence would be a straightforward process, though. Public sector pensions have changed significantly over the years, moving from final salary to career-average versions, and members have accordingly accrued all kinds of rights that the taxpayer acts as guarantor for. Whether it is a scheme with assets or not, Daniela Silcock, head of policy research at the Pensions Policy Institute, says that working out exactly what the liabilities are and exactly which government should be liable for which part of them would prove a vastly complicated task.

“I don’t know how they would do that,” she says. “It would be very interesting and they would have to do a lot of calculations.”

“Even if you could agree the principles, working out the practicalities would be long and complicated,” Ralfe agrees. “The state pension is the easy one; public sector pensions are not so easy.”

That is not to say the pensions doomsayers are necessarily right. During a recent grilling at FMQs, Sturgeon told the Chamber that “an independent Scotland may be able to improve the level of pensions” paid by the state and, given the demographics of Scotland in relation to the rest of the UK, she may well be right.

“Because there is a lower average life expectancy in Scotland [than the UK as a whole] it might give the Scottish Government a bit more freedom on how it manages the state pension,” Silcock says.

“In the UK there’s one universal pension age, which isn’t exactly fair for people who have a lower life expectancy. It could mean that it’s managed in a different way in Scotland – some people could get an earlier state pension if they have lower life expectancy. That’s one of the ways people in Scotland currently lose out on the state pension – they get the state pension for a lower proportion of their adult life.”

A similar idea was floated at the UK level several years ago to make allowances for regional and health-related variations in life expectancy. It was argued at the time that, as people can defer taking the state pension in return for enhanced payments at a later date, there should also be the option to draw reduced payments before reaching state pension age.

The plan was rejected in 2017 following a review by former CBI director John Cridland. Though he conceded those in the poorest parts of Scotland die considerably younger – and so receive the state pension for a considerably shorter period – than those in the wealthiest parts of England, Cridland said there was a risk that allowing reduced payments would lead to inadequate retirement incomes.

The question of how to pay for something that is funded through current-year taxation is clearly vexed in a country with a swiftly ageing population, but, funding aside, there would be nothing to prevent a similar – or even more progressive – system being created in an independent Scotland. However, given the integrated way in which people live and work across the United Kingdom, it would complicate matters further, Eiser says.

“The debate taking place recently is about a fairly specific group – those who will be above the state pension age when Scotland become independent and are already receiving a state pension from the UK,” he notes.

“Over time that group will become smaller and smaller, but it will be replaced with other groups. Some people will spend part of their life in Scotland, part in England and maybe work across the two jurisdictions. There will need to be all kinds of rules about how you deal with that. Maybe they won’t get the full state pension from either and the state pension system in an independent Scotland might end up looking quite different. How will that affect the agreement between the two governments on the rules for cross-border movers?”

For now, though, while there are plenty of opinions about what could or should happen with pensions in an independent Scotland, the truth is that it is impossible at this stage to say with any certainty. That is unlikely to be satisfactory for the general public, which will undoubtedly want clarity on the issue prior to heading to the polls. But, with even the question of whether there will be another independence referendum far from settled, it is in neither side’s interests to show its reasonable side at this early stage of the debate.

“The bottom line is it will need to be negotiated as part of the overall settlement in the event of independence,” says Ring. “What is being flung back and forth by politicians at the moment feels more like posturing.”

And that, for Silcock, is where the true complexity of the pensions issue may – or may not – lie. “The only potential complication is whether or not everyone behaves reasonably,” she says.