Was the UK bound to pay Scottish pensions after independence?

Pensions are a fiendishly complicated subject. They needn’t be but they are because governments of all stripes like to tamper with them in their private and public forms. They are also often the key to any election as they represent the main cohort of society that actually bothers to vote.

Get pensions wrong and you can probably kiss goodbye to any electoral success.

Taken together then; complexity and a third rail of elections and you have a wonderful recipe for disinformation.

It’s strange because at the start of the campaign it looked like the nature of state pensions at least were going to be uncontentious from a factual point of view.

The Scottish Government set out a very good paper Pensions in an Independent Scotland a full year before the referendum. In this they clearly set out the priorities for pensions and how they would operate in an independent Scotland.

Remarkably, given what followed, this paper set out in very clear terms that existing pensioners in receipt of a UK State Pension would after independence receive a Scottish State Pension paid for by the Scottish Government rather than the UK Government.  

So one year before in a not exactly technical document the Scottish Government stated that existing pensioners would no longer receive a UK pension.

Politically this was a huge blunder by the Scottish Government, it’s likely that Better Together were having a field day when this publication was uploaded to the Scottish Government website.

Simply put the Scottish Government had confirmed that for existing pensioners their UK pension would end on independence. Granted it would be replaced by an identical Scottish State Pension paid by the same offices in Scotland but the fact was the UK Pension would end.

As the detrimental effects of the Better Together propaganda message began to sink in the Yes Campaign realised that they would need to muddy the waters. Enter the disinformation campaign, helped on by the Department of Work and Pensions.

Worried pensioners had started to write to the DWP long before pensions became an issue in the independence campaign. The DWP quite correctly wrote back to those pensioners setting out the legal position taking the Scottish and UK Government’s positions on board.

The State Pension will continue as present.

It was not for the civil service after all to then comment on who would be administering or paying for pensions in an independent Scotland and such replies were designed to reassure voters without straying into politics.

But they did stray in, or rather Alex Salmond dragged them in.

In desperation the Yes movement effectively decided to rip up their pensions policy and replace it with rhetoric in an attempted to imply that these DWP pronouncements meant that the UK would continue to pay existing Scottish Pensions after independence.  

Next was Steve Webb’s (the Pension Minister) evidence to the Scottish Select Committee, specifically the session in which Webb gave evidence was prefaced by the Committee Chair Ian Davidson noting that they wanted to discuss rights to pensions “as distinct of who is paying for it”.

In his evidence Webb made very clear that after independence Scottish pensioners would still have an entitlement to the pensions they had built up in the UK. There is really no question about this, morally people who have paid into the system are entitled to the pension they were promised by the state. The only issue was which state would be fulfilling those obligations post  independence.

There then followed an array of judiciously edited YouTube videos cut to show Steve Webb saying that pensions would be guaranteed. The implication being that they were guaranteed to be paid by the UK state, despite the fact that the question of payment was dealt with later by Webb in written evidence.

As so often with many in the Yes movement this really failed to give the full picture.

To understand the full picture one would need to view the written evidence as well, which specifically covered the question of who was paying for pensions after independence.

In this Steve Webb made it very clear “I would think the Scottish people would expect their Government to take on full responsibility for paying pensions to people in Scotland including where liabilities had arisen before independence. Similarly people in the rest of the UK would not be expecting to guarantee or underwrite the pensions of those living in what would then have become a separate country. The security and sustainability of pensions being paid to people in Scotland would, therefore, depend on the ability of Scottish tax payers to fund them.”

This position is entirely in line with that set out by the Scottish Government in their own pensions paper. The responsibility for all pensions, including those in payment, would fall to the Scottish Government for Scottish citizens and the rUK government for UK citizens. Afterall the UK would not be paying for unemployment benefits in Scotland after independence and in this respect pensions were no different.

Given the transfer of state pension obligations from the UK to the rUK and Scottish state after independence it would only be right and proper that the states split the assets backing their pension obligations on a similar basis.

If state pensions were a employer pension scheme this would be a complex but routinely completed task. However state pensions are very different. They are not funded at all, they are paid for out of transfer payments.

So today’s workers who are paying taxes and National Insurance (NI) contributions are directly funding the pensions payments of existing OAPs. UK State pensions are and have always been transfer payments from one generation directly to another.

Whilst there is actually an NI fund this is just an accounting method of managing NI contributions as the IFS notes:

These exercises in shifting money from one arm of government to another maintain a notionally separate Fund, but merely serve to illustrate that NI contributions and NI expenditure proceed on essentially independent paths. The government could equally well declare that a quarter of NICs revenue goes towards financing defence spending, and no-one would notice the difference.

Therefore Scotland would be entitled to a share of the assets backing current and future pensions in respect of their obligations to existing and future Scottish pensioners but an 8.5% share of zero is nothing.

In summary then under independence Scotland would have taken over all state pension obligations to Scottish citizens and they would have received no financial compensation for this obligation. Like the UK now pensions would be paid for by existing workers and would depend entirely on the government’s ability to pay.

Both sides officially agreed on this point, but in desperation the Yes movement attempted to hoodwink voters into believing something implausible that contradicted their own written policy. It was a triumph of spin over substance that still today Yes campaigners cannot accept the very position set out in black and white by the Scottish Government 12 months before the independence referendum. 

ADDENDUM 28 January 2017

* Having looked into this more I've realised that the DWP letter is actually factually incorrect. There was no legal assurance that on independence that there would be no effect on the UK Pension. Had Scotland not been in the EU or Scotland and the continuing U.K. did not agree a welfare sharing agreement then, like in Australia, Scots pensioners would not receive annual increases in their pensions. Whilst this was likely to happen it was not qualified in the letter and therefore was legally incorrect. This further emphasizes the civil servant writing this 'one' letter was seeking to assure a pensioner (albeit incorrectly) rather than stating a change in government policy.