UK pensions

Recently a neighbour mentioned to me how the SNP had pledged to double pensions in an independent Scotland. I knew this wasn’t the case and did indicate that I was sceptical, but in the interests of neighbourly peacekeeping I didn’t go into details,, but did urge him to look up what they'd actually voted on. Nevertheless it does appear to be a commonly held conception among nationalist supporters both that pensions in the UK are terrible, and that an independent Scotland would magically find the money to massively increase them without taking it from another part of government expenditure (or indeed in the typical indyfantasy to increase them while simultaneously increasing spending on most other areas too).
In reality, far from there being an SNP resolution to double pensions, there was a vote at an SNP conference in late 2019 to back a plan to investigate the raising of pension payments in an independent Scotland to try and meet the OECD average of 63% of previous earnings, and how that might be afforded. Which is is all well and good, however one wonders what would have to be sacrificed and by whom to achieve it, or will happen if the conclusion is that it’s not affordable, we all remember how the Growth Commission Report was brushed under the carpet, and how any in-depth honest debate of it was avoided when it didn't say what the masses would want to hear.

Of course UK state pensions are constantly under attack by SNP because the headline that the ‘UK state pension is the lowest in Europe’ makes an handy soundbite to weaponise and hit the union with, even if it is rather lazy on detail. However, as with most things the reality is somewhat different and much more complex.

Comparing pension systems
The problem with comparing pensions internationally is that each country has a different pension ‘ecosystem’; people retire at different ages, they pay in different proportions, they have different access to additional benefits and perhaps crucially they have different access to alternative means of providing a pension or income in retirement. Also the extent of long term-liabilities on the state varies, and for some countries with big and growing liabilities something is going to fail at some point.

These handy comparisons that are banded about, take little or no account of significant differences between the UK pension ‘ecosystem’ and that of other countries. The easiest way to understand this is to think of ways in which pensioners could obtain retirement income. There are four main sources:

State pension: This is the income the state pays you when you retire, however it can be calculated a number of ways e.g. same for everyone (flat rate), or based on former earnings, it may also be based on how much or how many years you contributed. It almost certainly involves you, and sometimes your employer paying in a certain amount of your earnings to the government.

Occupational pension: This is a pension scheme provided by your employer, you may have to pay some money in from your earnings and your company will put some money in too, some more generous employers may contribute all the money (although your salary may reflect that). The pension may be calculated as a proportion of your final salary or average earnings, or it may be a scheme based on income from investments, and contingent on their performance. Not all countries practice this sort of system, the companies may just pay into a state scheme instead

Private pension: This is an income derived from a scheme that the individual sets up with a pension company, or possibly buys from a pension company using a large lump sum payment. It may require paying in a certain amount on a regular basis over many years. And will generally be based on investments in a range of assets and the amount your get back out will be dependent on asset performance.

Savings and investments: essentially income from other sources such as cash savings, investments funds, shares, property etc.

Oh, and I suppose we should throw in a fifth:

Work: Many pensioners continue to work as a way of topping up their income and or doing something they enjoy or to keepi mind/body active. 

There may be other sources of retirement income but those are the main ones. The important thing to remember when comparing countries is that the relative proportion of average pension income that these different sources make up varies considerably from country to country. Thus to only consider a single factor when trying to calculate how well off pensioners are  in general can give very misleading results. 

Testing the comparison
If we just compare just the state pension then the UK comes quite far down the list relative to other advanced economies as a proportion of previous earnings, but once you add in the other sources the comparison improves considerably. That’s not to say that UK pensions are great, there is still plenty room for improvement.


The fact checking website Fullfact concluded that when comparing the minimum income of pensioners in France, Germany, Spain and the UK that: "UK pensioners can expect slightly more money from the government than their European counterparts, although comparing gross figures doesn't take into account the different average incomes and cost of living in these four countries." (Fullfact pension compare 1)
This is because while the maximum state pensions and the average in these comparison countries is higher, the amount the poorest receive is subject to a range of top-up benefits which result in UK being much more in line with the others.
The same article also has a graph that illustrates the much bigger role that occupational pensions play in the UK: Six times more important than in Germany and such pension schemes are almost non-existent in France and Spain. Acknowledgment of this important factor is also usually non-existent when pensions are used by separatists to attack the UK.

Fullfact have examined these sort of claims more than once too: (Fullfact pension compare 2).

The UK approach is sometimes referred to as ‘multi-pillar’ because pension income is supported by a number of sources, Denmark and the Netherlands are broadly similar, but many other European counties, such as the aforementioned French, Germans and Spanish rely much more heavily on the public pension pillar. This means that much of the burden of pension provision falls on the state rather than being spread across state, employers and the individual. All well and good if the state has been responsible in how it funds them, but if it hasn’t……

And what we find is that many countries run their pension schemes as ‘pay as you go’ where payments coming in from people are not invested in assets for their future but used to pay current pensioners, leaving their future affordability vulnerable to economic and demographic changes. The UK does this but as we’ve seen the UK state pension is proportionally significantly less on average than in most European countries so the burden on the state is also theoretically less (although still significant). Some other countries have a much bigger timebomb built into their system (IEA demographic time bomb). This has led many countries to increase (or try to) their statutory pension age and to consider a greater role for private provision as already occurs in the UK and Netherlands for example, but it’s easy for opposition and populist parties to portray a reduced role for state pensions as government cutting people’s ‘rights’ and thus resistance can be significant.

Unfortunately the UK system requires people to think about their pensions and to forward plan if you want a good one, something that many UK citizens seem reluctant to do. Also the generosity of occupational pensions has declined significantly in the last twenty years and some have closed entirely to be replaced with pensions people have to organise themselves. And of course the lowest earning don’t always have the luxury of making additional provisions. 

The question remains, that if an independent Scotland is to dramatically increase state pension provision, how will it fund it, and how will it affect the occupational and personal pensions of millions of Scots, or indeed the very significant pension and investment industry that employs many Scots to provide those services. Current Scottish state pensions are not backed by any sort of fund and are paid out of tax receipts, there is no fund to be handed over on Independence Day, an independent Scotland would have a pay as you go scheme from day one….

Then there is the very significant question of how existing pension entitlements are dealt with in an independent Scotland where the pound is replaced by a new Scottish currency. See my next post for how that might play out on those Scots who have diligently paid their way.