This article is part of our Vision for Scotland series, where business for Scotland members share their ideas for a better Scotland in order to stimulate intelligent debate and discussion.
The independence debate is providing the nation a rare chance to more thoroughly debate new ideas and fresh thinking as we seek to consider what tailored innovative Scottish solutions could be devised and successfully executed to overcome the challenges and seize the opportunities of our time.
What follows is a summary of a proposal to create a new pensions system for an independent Scotland which simultaneously creates a Sovereign Wealth Fund (SWF) that serves as a major source of finance to support the transition to a new fairer, greener, more prosperous, more environmentally sustainable economy which benefits the nation as a whole.
A Pensions Model for Scotland
The proposal is to collectivise into one “super fund” all the occupational pension schemes which have members who are employed in Scotland (whether the employer is headquartered in Scotland or not). This includes private and public sector schemes as well as defined benefit and defined contributions schemes.
The fund will be the source of pension payments to Scotland’s citizens when they retire. Benefits will be based on earnings, so the scheme will be of a defined benefits character for all. The scheme will cover all citizens whether they are currently in a pension scheme or not.
Employers and employees will pay contributions into the fund based on a fixed percentage of payroll. The employer will contribute at least half of the contributions with the apportionment of the other half being a matter for collective bargaining. The state will pay the contributions for the unemployed and others who are unable to work due to a disability, caring responsibilities, etc.
The fund will be invested in accordance with strict principles which include the requirement for the fund to be invested in a manner which supports the development of a fairer, greener and environmental sustainable independent Scottish economy and also facilitates the transfer of political and economic power to communities.
The fund will be managed by a National Board of Trustees whose responsibilities will be to protect the long term viability and financial sustainability of the fund so that it is able to provide a decent level of pension provision for all into the future as well as fulfil the investment principles of the fund.
The investment model adopted will be a stewardship model whereby the fund acts as a long term committed investor in enterprise and infrastructure in exchange for binding agreements regarding the cash flows returning under agreed conditions to the fund over time. The investment practices of the fund will avoid speculative trading of assets.
This model offers solutions to several major challenges.
It provides a sovereign wealth fund which can support the development of a new economy, including a rapid scaling up of renewable energy, and the expansion of community owned enterprise. Scotland’s responsibility to contribute to tackling climate change will shorten the life of its North Sea fossil fuel reserves and, therefore, those reserves cannot be the source of revenues to build a sovereign wealth fund.
It provides a defined benefit pension scheme for all citizens, thereby collectivising investment risk across the whole of society and removing that burden of risk from sponsoring employers of defined benefit (DB) pension schemes and from the beneficiaries themselves in defined contribution (DC) schemes.
It relieves businesses from the responsibility of funding pension deficits in DB schemes, thereby freeing up their capital to be dedicated to the real purpose of the enterprise.
Any “deficit” in a collectivised scheme is highly unlikely ever to be realised….such a scheme is highly unlikely to become insolvent – the state is capable of bolstering the fund if ever the deficit were to present a real risk to the pension system and/or the economy.
The provision of a large fund for the payment of future pensions reduces the inter-generational burden of pension provision. In a state pay-as-you-go pension system funded out of current taxation the current working population funds the pensions of the retired generation of pensioners. That will not be the case in the proposed model except so far as the pay as you go (PAYG) state scheme may be called upon as a “top up” scheme where pensions paid from the SWF fall under a specified national minimum.
Whilst the “deficit” in this model is not such a critical factor as it is in the present pension landscape we have today, it remains a desirable objective to maintain the solvency of the SWF. There will remain a requirement for an actuarial approach to the determination of contribution levels and the benefits structure. Unless this is done the long term viability of the fund could be weakened, thereby increasing the risk of the state being called upon to make good the deficit. Such a scenario would result in an increase in the inter-generational burden. The design of the contributions and benefits structure and any changes to it will be a matter of public consultation, informed by expert actuarial advice.
Full details of the proposed model for a new Scottish pension system and sovereign wealth fund are set out in the paper “A New Pensions System for Scotland”, which will be submitted to the Common Weal project. I believe this is exactly the kind of opportunity that independence brings, which business, government and the broader population could and should be debating in the lead up to the referendum next year.
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