There is currently no pension system like it anywhere else. While countries such as the Netherlands, Sweden and other Scandinavian countries have highly regarded pension systems, they still operate in accordance with orthodox ideas about public finances and the management of pension fund investments.
The proposals for a new earnings-related pension system for Scotland, comprised of a state earnings related pension (SERP) and a National Pension Fund (NPF), are derived from the understanding that a state which issues its own currency is not constrained by any supposed “shortage of money” and does not rely on taxation to finance public services and benefits such as pensions.
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Although Sweden, for example, issues its own currency (Swedish Krona) its pension system is based on the belief that the state pension is financed by pension contributions (16% of earnings) and that any shortfall between contribution income and pension payments must be funded from elsewhere.
Sweden deals with any fiscal deficit attributable to state pension through a transfer from five “buffer funds” which were established at various times in the past.
The “AP Funds” or “Allmanna Pensionsfonder” (Public Pension Funds) provide financial support to the state pension system.
Unlike normal pension funds, they do not pay pension benefits and they do not have any contributing members.
The Swedish state provided the initial capital and the funds have subsequently grown in size so that they now manage SEK2.1 trillion of assets (about £160 billion).
Their creation was based on the belief that, despite having its own currency, the Swedish state can suffer from a shortage of money and depends on investment returns generated by the AP Funds.
The proposed Scottish pension system assumes the state can and will pay SERP benefits in full and that this is derived from having our own currency.
However, it also depends on the Scottish people electing governments that understand that, for a currency issuer, taxes are not required to pay for public services or welfare benefits such as a state pension. If Scotland is governed by politicians who maintain the belief that tax (including National Insurance contributions) pays for public spending, a new earnings-related pension system, consisting of a SERP and a NPF, would not be viable.
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How much of SERP spending was balanced by taxation would be a matter for overall fiscal policy and will depend on whether Scottish governments choose to run a deficit attributable to SERP spending.
The intended role of the NPF is not to finance any pension-related fiscal deficit. Its role would be to provide a defined-benefit second pension.
The Scottish state would provide a guarantee to the NPF in the event that there was a shortage of liquidity to cover pension payments. It could do this if it is the currency issuer of a Scottish pound and if governments understand the greater policy space they can operate with as a currency issuer.
To summarise, based on an understanding of the fiscal capacity of a currency issuer, the Scottish state can provide a SERP and also underwrite the NPF and the DB second pension scheme – the opposite of the Swedish model where non-state “buffer funds” guarantee the fiscal neutrality of the state pension.
If the Scottish state is a currency issuer it is valid to ask why shouldn’t the SERP be the source of all pension benefits and why bother with a NPF?
If we were starting from scratch, having a SERP as the only source of pensions would be an option. However, we are not starting from scratch because Scottish citizens now own about £250bn of assets held in UK pension funds (out of a total of about £3 trillion UK pension assets).
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Many of these are in defined contribution (DC) pension schemes, such as the UK NEST, multi-employer, DC pension scheme, which currently has more than 13m members and more than £40bn of assets under management. These funds are failing to provide capital for productive purposes.
The objective of the proposed NPF is firstly to create a new DB-based fund into which Scottish citizens can transfer their existing second pensions, and to function as the provider of a defined benefit second pension in addition to the SERP.
Secondly, the NPF would also function as a wealth fund, managing its investments primarily to support the transition to a wellbeing Scottish economy and building the future productive capacity of the economy so that the needs of all can be met.