Protecting Pensioners

“You’re mugging old ladies every bit as much if you pinch their pension fund” – Ben Elton

(This blog post previously appeared in Common Weal’s weekly newsletter. Sign up for the newsletter here.)

Last year, Bill Johnston and I published our book All of Our Futures – an exploration of ageism in Scotland, how it causes inappropriate policies regarding age and ageing and what Scotland could do instead to create a country that we can all safely, securely and proudly grow older in. In one of the chapters we discuss how an independent Scotland could improve policies around pensions.

This is one of the topics of great interest to everyone on all sides of the constitutional campaign but it’s also a topic that few attempt to tackle in any great detail. However the team here at Common Weal recently realised that while this chapter of the book represents our most up to date thinking on an independent Scotland’s policies towards pensions, we don’t actually have a dedicated Policy Paper on the topic beyond some higher level aspects such as in our 2017 paper on Social Security or discussions around debt and asset transfers found in our book How to Start a New Country or my paper for the Scottish Independence Convention, Parting Ways. This newsletter article will go some way to redressing this but it can only remain a short summary of what is laid out in much greater detail in the book. One thing in particular to bear in mind when discussing pensions is that there are two aspects of them which must be handled differently if not quite entirely separately. The state pension and private pensions.

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THE STATE PENSION

The UK state pension is often framed in blatantly ageist terms. The “affordability” of the state pension is couched behind a statistical tool known as the Old Age Dependency Ratio (OADR). This is a measure of the number of people in a society who are of state pension age compared to the number of people of working age. The implication being that the income tax and National Insurance paid by young, productive workers is used to support now old, unproductive pensioners. The general demographic trends of Scotland (and almost all “developed” countries) is that this ratio of the number of pensioners to the number of workers is rising. There are currently around 310 pensioners in Scotland for every 1,000 workers. This is projected to rise to about 400 pensioners per 1,000 workers by 2040. The implication of using the OADR is that pensioners are becoming an increasing burden on our workers and that “something should be done about it”.

For all intents and purposes though, the UK does not pay the state pension solely via income tax and National Insurance (Yes, the National Insurance Fund exists and is funded by National Insurance contributions but it is also topped up via overall Treasury funding in case of shortfalls so the principle is moot – and there are good reasons to oppose the “hypothecation” of taxes as a general rule anyway).

There can be some sense of intergenerational solidarity in linking workers to pensioners (“I, a worker, am helping to support those older than me) or – if we take a more individualistic approach at least one of “paying in” to the system and earning an obligation in the future (“I’ve paid my taxes and now I’m due a pension as a reward.”) but as it is being used just now, it merely fosters intergenerational resentment and limits the scope of policy ideas to reform the system.

To cut a long story short, if we free ourselves from thinking that the state pension is reliant on direct taxation of workers’ wages then we avoid problems caused by suppressed wages or labour being disrupted by automation and we can start looking instead at taxing land, wealth or polluters as a means of disrupting damaging behaviour whilst socially securing our future in retirement. We also can stop thinking about a fixed “retirement age” after which healthy people are written off and before which more deprived people are forced to continue working despite declining health and wellbeing – perhaps for more than a decade, before finally being allowed to retire for what remains of a life already shortened by that state-imposed deprivation.

I would like an independent Scotland to fold the state pension into a Universal Basic Income that can adequately support people whether working or not. This would give you the freedom to choose how and when you taper down or stop working as you get older and if you choose to do so at all. Other chapters in our books also outline how employers and workplaces can adapt to make it easier for people with different or changing needs (not just those related to age) can still work to their most productive. We, of course, need to have a discussion about what level to set the state pension or that UBI and it’s clear that the current state pension is completely inadequate (especially for those without private pension top ups as we’ll see below) but while I think we can all agree that the state pension must be high enough to sustainably live on without additional income or support, there’s much more to fixing the deeper structural problems than by simply fudging together some extra cash.

PRIVATE PENSIONS

The private pension sector is more complex to deal with but it is an important part of retirement income for many. The UK is unusual in Europe by the sheer size of its private pension sector. It’s often said that the UK has one of the lowest state pension payouts in the OECD and this is true but it does tend to obscure the fact that average British retirement incomes – whilst too low – are around average for OECD countries. On average, only around half of a retiree’s income derives from public pension sources with the other half being split between private pension schemes and from other capital and savings such as money derived from selling a house and “downsizing” upon retirement. In many other European countries, public sector pensions make up a much larger proportion of retirement income – 90% or more in some cases.

This, alongside decades of deregulation of the sector, leaves British pensioners much more vulnerable to the predations and failures of the private pension “market” than folk in other countries. British pensions were gutted with the decline of the “Defined Benefit” pension (something that went the same was as the idea of a “job for life” within a single company), not to mention the cases of outright fraud and theft when companies underfunded or raided those schemes. Instead, we all ended up with “Defined Contribution” schemes which weren’t much more than glorified savings accounts with complicated fee structures hiding how much was being skimmed off of them by the fund managers.

Recent regulations have tightened things up and those fees – while still comparatively high – have come down. Auto-enrolment has improved pension savings and overall returns on British pension schemes are now much closer to European norms. However, it can still be difficult to track where all of our pension pots are now. The average British worker now will retire with eleven different pension schemes having worked for six different companies across their working life. It can also be very expensive to merge or consolidate those schemes or to take one with you to a different employer (many employers will allow you to pay into a pension scheme other than the one they offer but only if you sacrifice their employer’s contribution).

The result is that it is extremely difficult to “shop around” for the best deal and, almost inevitably, you lose potential savings to fees that end up in some shareholder’s pocket. With such a large proportion of average pension income being reliant on private schemes then a lot of people could be extremely vulnerable to the impact of a housing bubble or a stock market crash wiping out their savings shortly before they retire. Not to mention reports in 2017 that 31% of people in Britain had no private pension savings or capital at all and were solely reliant on the woefully inadequate state pension.

Sorting this mess out will be hard. We cannot compel people to move their savings and simply nationalising all of the pension providers could be prohibitively impractical. This does not prevent an independent Scotland (or perhaps even a devolved Scotland) from setting up a National Mutual Pension Fund along similar lines to that maintained in several European countries – notably Sweden.

The NMPF would be an alternative rather than a strict replacement to any pension scheme offered by an employer (if they offered a private alternative) and there would be a mandate that access to the NMPF scheme would be on terms not worse than the private provider – this means that the employer offers an employers’ contribution on their private pension scheme then you could opt in to the NMPF with the same employers’ contribution or better but never with less. The beauty of this system is that if you move to a different company, you can take your NMPF pension pot with you and greatly simplify your own management of the scheme. Assuming increasing adoption, this would slowly remove Scottish workers from the private pension sector (or force it to change to keep up) and could remove the profits from pension provision. It might not entirely remove the risk of a multi-sectoral economic collapse (though deconsumerising our economy would!) but being publicly owned and a single source it might be easier for the Scottish Government to bail out in extremis and being a mutual owned by its savers, that bailout wouldn’t disappear into a tax haven.

Being a mutual company, you’d also have the opportunity to have some say in how the overall scheme was invested. Scottish pension funds could be invested in Scottish infrastructure designed to improve the wellbeing of people in the country rather than in companies fuelling the climate emergency or in illegal weapons of mass destruction.

CONCLUSION

This isn’t the first word that Common Weal has had to say about pensions and independence and it certainly won’t be the last either. However the idea that an independent Scotland could only aspire at best to what the UK currently offers is far from the truth when so many of our European neighbours already do things a lot better than we do. Let me hear your thoughts though. What else could Scotland do to improve the wellbeing of pensioners (either now or after independence)? How easy do you find it to manage your own pension pots? Do you think you’ll be able to save enough to retire on?

If you want to read more about our thoughts on pensions or what else can be done to improve the wellbeing of people as we all get older then please do check out our book All of Our Futures in our shop.

You can also watch a preview of the other chapters in this presentation Bill and I gave to Pensioners for Independence back in May.

Video from Independence Live 17th May 2022

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