‘What Pensions Arrangements Would Scotland Need?’

A paper from the Institute of Chartered Accounts – the question is taken from their subtitle – offers a complex series of questions about pension arrangements.  I’ve raised some of the issues previously in my own submission to the Expert Working Group considering welfare in Scotland.  Pensions are much more difficult to manage than means-tested or universal benefits, which can be delivered and adjusted according to circumstances.  Most pensions are based in established entitlements, based on previous contributions.  That leads to three problems.  The first is how to deal with the rights established for state pensions.  The records are centralised, and entitlements are held by expatriates as well as people in the UK.  It would be difficult to respect those arrangements.  The obvious way round the problem is one that the coalition government has already moved towards, which is to replace the contributory pension with a more universal flat-rate benefit.

The second issue concerns occupational pensions.  It’s clearer in this case where the liabilities lie, because the rights are held in relation to specific funds; in principle, cross-border pensions should work on the same basis.   There is a problem, however, in the way that such funds have  been set up in the UK, often avoiding essential EU regulation.    If a firm declines, or if an industry shrinks, the number of contributors falls, and the resources to pay the pensions are reduced.  The essential way to deal with this is for funds to pool their risks, a process usually referred to  as ‘solidarity’.    The absence of those protections means that many schemes are insecure or non-viable.  The issue has been left to fester for too long.

The third issue concerns transitional arrangements.  The entitlements that people earn last for decades; for example, there are people working now who paid for a Graduated Pension in the 1960s and 70s, and elements relating to the Graduated Pension, which are worth very little, may still be around forty or fifty years’ time.  There is a quick and simple answer, which is to buy out entitlements.  That, of course, would cost money.  However, the alternative – which is to keep existing arrangements for another eighty or ninety years – will cost more over time.

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