THE pensions system could be poised for a radical shake- up following Scotland’s referendum – whatever the outcome – industry insiders say.
Malcolm Paul, chairman of multinational JLT’s burgeoning Scottish business, says differences in life expectancy and demographics north and south of the Border could make the case for a more flexible system.
If Scotland were to vote “yes” in the referendum then the likely date for independence – 2016 – would coincide with the introduction of the flat rate state pension in the UK. At the same time, the UK government will carry out the first of its obligatory five-year reviews of the new system.
Paul said that if that coincided with Scotland becoming independent, it could choose whether to take on the new system or not.
“There are a lot of big questions that will arise,” he says. “The state pension age is a big one because the UK government is trying to drive up the retirement age.”
He says Scotland may find that it does not have to introduce the rises in the state pension age due to be phased in across Britain. Because Scots have, on average, a lower life expectancy they could be given more money or allowed to retire early. But Paul warns that set against that the “demographic time bomb” – the problems associated with an ageing population as baby boomers retire – is more acute in Scotland.
However, Paul believes there could be pressure for change even if Scotland remains part of the UK, as the disparity in life expectancy makes the flat rate state pension a poor deal for those who are not likely to live long to enjoy it. He suggests a system that is already being used to address black holes in company schemes could be considered.
“Companies are getting fed up of throwing money into their pension black holes,” he said. “We are finding a lot of interest in looking at alternative solutions, a lot of which involve giving people the flexibility to agree their own terms.”
This allows people to look at taking a pension at an age that suits them and perhaps giving up the index linking of the payout in order to get more money in the early years of retirement, which Paul says can make sense to some people as many pensioners are more active in the early days of retirement.
“Under the usual system the biggest payment someone gets is the one before they die,” he says. “But pensioner inflation is not really like consumer price inflation because people tend to spend less as they get older.”
The problem of black holes in private sector pension schemes would become much worse for many companies that work across both sides of the Border should Scotland become a separate member of the EU. Firms operating in more than one member state come under European pensions rules that would oblige them to address any deficits.
John Wilson, head of research at JLT in Scotland, said under Solvency II rules that apply to other parts of the financial sector, the UK pensions black hole could be as big as £450 billion, although industry measures put it at a still worrying £100bn.
JLT’s Scottish workforce has grown from around 50 to 200 in the last seven months.