Why cUK wont be paying iScot pensions

And we're back! Yes it's yet another pension blog. 

I'm sorry but I really don't have any choice because the level of understanding on the topic is just horrific. It's bad enough MPs spouting nonsense but the feedback I'm getting from so many people just shows that I need to go back to basics on a few issues. 

I'm grateful to some friends and former workmates on Twitter and Scotland in Union for their feedback which has helped me to create this blog.  

Don't worry I'm not going to set out this blog as a pensions seminar, instead I'm going to take Philippa Whitford's assertion of pension policy at face value and show why it just doesn't work.  

I'm fully aware that whatever I write here isn't going to be comfortable for nationalists to hear, it's also not going to sound as neat and tidy as the lies they've been told about pensions. I also understand that, when you spent the independence campaign claiming it was Better Together that misled people on this subject, it's very difficult to admit the truth but sometimes the truth just isn't neat and tidy or easy. 

The Janet & John bit

Given that this post will get a little complicated I thought it best to start with as simple a summary as I can. 

In all of the following cUK refers to the continuing UK state, that is the state that exists after Scottish Independence. Where I use rUK that is referring to the UK excluding Scotland but before independence. Those are quite important distinctions given what follows. iScotland refers to an independence Scotland after the breakup of the UK. 

There are two models under discussion for pensions. 

1 - The Scots for Scots model which both the UK and Scottish Government agree on. This has Scots paying for all Scottish pensions (including those currently in payment) and cUK paying for cUK pensions. 

2 - The Whitford model which says that cUK will pay for existing Scots pensioners after independence. 

I'll argue below that the asymmetric Whitford model doesn't work and would collapse into option 1 even if it was agreed. 

Moreover if there is an obligation on cUK to pay Scottish pensioners after independence then there is an equal obligation on Scotland to pay a population share of cUK pensions. Scotland is part of the UK right now and pensions obligations have been built up under Scotland's membership of the UK. 

If the UK were to split into cUK and iScotland then iScotland would still be due to meet its obligations run up under the UK pension system and this would be split on a population share basis of all obligations. 

When you add all of this up, cUK paying for iScottish pensions minus iScottish contributions for all UK pensions, it works out against Scottish interests to agree to the Whitford model.

Let me emphasise that the key to all of this is that the cUK pension system is not the former UK pension system. This isn't a matter of pedantry but a fundamental misunderstanding on the part of nationalists such as Whitford. A simple pause for thought would illustrate this point but as usual nationalism is distracting from objectivity.  

This post explains it all in detail, with some helpful diagrams. 

The UK Pension Policy
Whitford's model takes its justification from Scottish National Insurance (NI) payers having paid into the UK system are due a pension from cUK, it is therefore not the Scottish Government's obligation to provide that pension. 

I've demonstrated here why that is nonsense, but let's walk it through.

SPOILER ALERT it's the use of the letter "c" in the above statement that trips her up. 
Our nice friendly graphic illustrates the model we're using. There are 11 people, 10 in rUK and 1 in Scotland (that is very roughly our population split). All 11 are part of the UK, all paying NI and all contributing into the UK pension system. Now we all know that those payments are going straight out of that blue box and paying for pensioners (who are in roughly the same proportion to these workers in each nation, although we'll stick a pin in that for now). 

These payments into the system are creating non legal obligations on the UK government to provide a pension for these payers in the future. 

So you pay NI in now, you get a pension in the future. So far so normal (hopefully).

Now we are going to travel forward in time (and the UK has remained as a single state), all our workers have now become pensioners. 



Our pensioners are all receiving their pension from the UK system (the workers of the future are paying in and supporting our pensioners). This is what we have right now and what we would expect from a normal state pension system funded on a pay as you go system. 


The Whitford Pension Policy
So what is the Whitford model of independence for pensions?



Now with Scotland an independent country its pensioners (according to this model) are still paid out of the cUK Pension System. So cUK's ten workers are supporting 11 pensioners (one from Scotland and ten from cUK). The Scottish worker on the other hand is paying into the newly set up Scottish Pension system. Of course this new Pension system has no pensioners to support at present so it's a bonus for the Scottish Government, lots of NI coming in and no pensioners to support at the start. 

It's an attractive prospect, no wonder nationalists such as Campbell (from Wings Over Scotland) was so mesmerised by it that it based the Wee Blue Book on it, and consequently ruined any credibly it could have.

Also no wonder so many nationalists want to believe this model, they let all objectivity leave them and believe that this is a credible alternative and that the cUK electorate would remotely put up with it. 

But let's leave the political logic aside and actually apply simple logic to the model.

If you step away from the flag, and the emotion of nationalism, and just look at the model, you can see the flaw in it. Try to take a moment to see if you can spot it (honestly it will be worth it for you to work it out yourself). 

The flaw
The flaw is simple. The cUK Pension system is, like the Scottish Pension system, a new pension system. It's easy to miss, after all cUK and UK are very similar and I deliberately made the boxes the same colour but they are not the same system (I told you it was the "c" that was the problem). 

Therefore we actually have something much more complex in play now. 

Not only do we have two new (and separate) Scottish and cUK pension systems but we also have the legacy UK pension system which has obligations to pensioners in both countries (this is known in the pensions industry as a run off scheme).  

It is this legacy UK Pension system that today's pensioners have built their "rights" in and that is the system they will be getting paid from (again if this looks bonkers to you remember this is Whitford's model)


So today's pensioners in cUK and Scotland are still getting paid from the UK pension system. 

But those obligations were built up by the cUK and Scotland so they need to be supported by both states on a population share basis. So cUK current taxpayers need to pay in to support all former UK pensioners (10 in cUK and 1 in Scotland) but Scottish taxpayers also have to pay into that system, on a population share basis. 

Scottish taxpayers therefore need to pay into the "former" UK Pension system paying for 1/11th of all the recipients. 

This may strike some nationalists as bizarre. However it's only bizarre due to the nature of nationalism. 

The obligations were built up under the UK (of which Scotland was a part) they therefore have to be paid out by the parties that were that state. Scotland is not in an exceptional position here nor could it expect to waive its financial obligations under Whitford's model unless we were talking about Scottish exceptionalism.  

If Scotland refused to pay into the UK Pension system then the cUK would also stop paying in, the legacy UK pension system collapses and stops paying pensions. Overnight the cUK Pension system and the Scottish Pension system would have to take over those obligations. 

Let's be clear here. We are not talking about sovereign debt (I cover that here) we're talking about a highly complex and over engineered political system that would have to rely on a huge amount of consent from both sides if it was to operate.  

There is no ability for Scotland to walk away from its obligations. Refusing to pay into the system would just result in Scottish pensioners having their UK pension stopped and we would end up with Scottish pensioners supported by Scottish workers and cUK pensioners supported by cUK workers. 

Or to illustrate that graphically.

 

Haven't I seen this before?
Now hopefully that graphic above does look a little familiar to you. That's because that is the pension system as proposed by the Scottish Government and Westminster. It's the model that both sides agree on, and for very good reasons. 

Firstly it is much cleaner and creates largely the same net economic outcome (more on that later if you can bear it). Now Scottish workers are just paying for Scottish pensioners rather than 1/11th of all former UK pensioners. Similarly cUK taxpayers are just taking care of cUK taxpayers rather than 10/11th of former UK pensioners. 

Secondly the system allows for two very different pension systems to evolve - as the SNP planned in their own pension paper. This is often overlooked by those seeking to claim that cUK would pay for Scottish Pensions. Under the Whitford model if the two systems did diverge then we could end up with a highly complex set of pension payments where the former UK pension system paid one part of pensions whilst the Scottish/cUK Government topped it up (or conceivably took it down) to adapt to their domestic pension policy. It would be beyond a nightmare to administer across two separate state systems. 

Thirdly it allows for payments in different currencies, something that the former UK system would not be able to cope with under the Whitford structure. If Scotland created its own Scots Pound then under the Whitford model pensioners would be paid in GBP whilst their costs would be in Scots£. That makes no sense and creates a chaotic welfare policy. 

Therefore it's really simple. This Scots for Scots model was selected by both sides over the Whitford model because its not only the only one that works, it's the only one that fits a model of independence. 

Compensation, don't go there
I know that some nationalists are really going to struggle to accept the fact that it was the Yes side that lied with regard to pensions during the independence campaign - despite the SNP's official position on pensions. They are going to be looking for a way out of this. 

I suspect that may fall on a lump sum payment (another of Whitford's suggestions). That works on the basis that the model of separate systems apply but the cUK Government will be forced (somehow) to pay a lump sum to Scotland in respect of its past contributions to the system.

However let's just think it through with the same logic as above. If there is a case for cUK to make a payment to Scotland in respect of the past pension contributions, then Scotland (as a former part of the UK) is equally due a payment to cUK: a population share the past pension contributions. 

When you add both of those together they would broadly balance out with one another. If I were a nationalist I would stop right there because the more you look into the data the worse it gets for Scotland (you might want to skip this next bit). 

Remember the pin from earlier? 

Scotland contributes less in NI than its 8.3% population justifies on a UK basis as the GERS methodology shows.

So Scotland is paying into the pensioner pool less that cUK but taking the same out.

"in mid-2012,there were 32 working-age people supporting every ten pensioners in both Scotland and the UK."

Yes it is true that Scottish pensioners have shorter lives than those in rUK but because there are proportionately more pensioners in Scotland the ratio is maintained. 

So in terms of the current system Scotland pays in less but takes out the same (proportionally) than rUK. That would mean in the event of separation and a set of compensation payments cUK would be paying less to Scotland than Scotland would be paying to cUK. On a net basis we'd be out of pocket. 

That's the fourth reason why the SNP are so keen on a clean break pension settlement, if only Philippa Whitford had thought it through. 

Pensions: just accept the inevitable
At some point the nationalist movement is going to have to face reality when it comes to pensions. 

They lied to pensioners during the independence referendum and they are still doing it now. 

Their alternative models make no sense at all unless your belief is that Scotland is exceptional and entitled to receive payment from a system designed to support all of the UK but isn't expected to contribute to the financial obligations of that system. 

Furthermore it leaves no room for a distinct Scottish system or currency, they cause administrative chaos, inevitably leading to the collapse into the very model proposed by the SNP and the UK. 

Finally the separate pension model is marginally financial beneficial to Scotland and therefore it's one that the nationalist movement should quietly accept and hope no one wants to look too deeply into. 

Pensions in an independent Scotland will be paid by the Scottish Government from Scottish taxation with no transfer of assets from the rest of the UK. If you want to make a case for independence then at least have the guts to base it on Scotland standing on its own two feet. 

This issue can of course  all be resolved by the SNP leadership. They have MPs (such as Whitford) not so quietly going rogue contradicting their policy on pensions (and others on GERS) and yet they are allowing it to happen. 

As Fraser Whyte points out for a party that prides itself in discipline this can only be the result of an explicit strategy by the SNP. Whilst the leadership recognise their stated policy they turn a blind eye to their MPs contradicting it as it helps stoke the fire of their strongest supporters letting them carry on thinking that their simple solutions are indeed the answer. 

Until they come to reality. I'll be here, writing blogs band banging my head on the keyboard in frustration.