Scottish Affairs Committee - Minutes of EvidenceHC 140-II

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Oral Evidence

Taken before the Scottish Affairs Committee

on Wednesday 5 March 2014

Members present:

Mr Ian Davidson (Chair)

Mike Crockart

Jim McGovern

Graeme Morrice

Pamela Nash

Sir James Paice

Mr Alan Reid

Lindsay Roy

________________

Examination of Witnesses

Witnesses: Professor Robert Wright, Professor of Economics, Strathclyde University, and Dr David Comerford, Professor of Economics, Stirling University, gave evidence.

Q4862Chair: Gentlemen, could I welcome you to this meeting of the Scottish Affairs Committee? As you are probably aware, we are conducting a series of hearings into various aspects of separation and what the impact will be upon Scotland. We are trying to make sure that people in Scotland have as much information as possible before they come to cast their votes. Today’s session is on the question of pensions and related matters. Professor Wright, it has been drawn to my attention that you are wearing the tie of the Scottish Economic Society, which is also being worn by our adviser, Professor Gallagher. What a small world this is. I am not checking the ties of the rest of the gathering, but there might very well be some duplicates from Marks & Spencer somewhere, though I am not suggesting that your tie is. Can I start off by asking you to introduce yourselves and tell us the work you have done on pensions and benefits that would be relevant to our inquiry? The man with the tie first.

Professor Wright: My name is Robert Wright. I am professor of economics at the University of Strathclyde. I am originally from Canada, but I have lived in Scotland for 24 years, and I have been carrying out research in the area of population economics for about 30 years. I am very interested in the economic causes and consequences of population ageing, and in demographic change more generally.

Dr Comerford: I am David Comerford, a research fellow at Stirling University. At the back end of last year we wrote a paper on pensions, which was published in the National Institute Economic Review in January, basically using the latest Office for National Statistics projections.

Q4863Chair: Can we start off by asking both of you to outline for us the key features of Scottish demography that are relevant to the debate on pensions, so that we have it on the record and for background?

Dr Comerford: I have prepared three snapshots from the Office for National Statistics 2012 projections. The current situation in Scotland is that we have slightly more people of working age, very slightly more people of pensionable age and fewer children. The consequence of that is that the old age dependency ratio, which is the number of old people divided by the number of workers, is about the same. We have more old people and more workers and the ratio is the same. The total dependency ratio is more favourable in Scotland, because there are slightly more pensioners, fewer children and more workers.

Although the numbers change as you go through the ONS projections, the pattern stays pretty much constant. The old age dependency ratio is always roughly the same; it is one decimal point. The old age dependency ratio is the same in Scotland as in the whole of the UK. The total dependency ratio is always more favourable in Scotland, because it has fewer children.

Professor Wright: I agree. However, I am not so happy about the approach of just comparing population projections in the future, because this is based on a set of assumptions to do with fertility, mortality and net migration, and nobody can predict the future, so there is a lot of uncertainty. To understand the situation David has just described, we must look at the demographic path of Scotland over the last 50 years. There have been a couple of big differences. These differences are going to create potentially a bit of divergence in the path in future. Fertility in Scotland has been below replacement level for a longer period of time than for the UK as a whole; it has had much heavier out-migration-negative net migration-for a longer period of time than for the UK as a whole; and it has much higher mortality and lower life expectancy, and that has been the situation since the second world war.

This means that population momentum in Scotland is different from that of the UK as a whole. But if, say, we have constant fertility in the future, as the projections show, and life expectancy is going to increase, mortality is going to go down and net migration will be at a lower level than we have now-we make analogous assumptions for the United Kingdom-and if we focus on population ageing as being, for example, the increase in people in the age 65 and above group, or 85 and above, there is no real difference between what is happening in Scotland versus the rest of the UK. As David mentioned, the difference is that, under that set of assumptions, the labour force in Scotland-the number of potential workers-is going to decline or grow at a very low rate compared with the rest of the United Kingdom; and in Scotland we are also going to see a reduction in the number of young people, where the expectation for the UK as a whole is that it is going to rise. That is why you get a pattern of changes in the dependency ratio that is slightly different. My research and understanding of the subject suggests there are no massive differences in the rate that the population is ageing if you focus on only the growth in the older age groups.

Q4864Lindsay Roy: Given what you have said, what might this mean for public spending in Scotland?

Dr Comerford: Robert has gone into some detail about what determines the components of these population projections. I have just used what the ONS projected. Under the projections they produced, we see that in the UK as a whole pension costs rise from about 12% of taxes now to about 16% or 17% of taxes in about 2040, so there is a large rise in the cost to the UK from the ageing population. The effect of slightly heavier mortality in Scotland is to make that rise 0.8% higher than in the UK, so there is a small additional effect. Scotland has a worse outlook in terms of the cost of pensions compared with its tax base, but the difference between Scotland and the UK is small in relative terms.

Q4865Lindsay Roy: Is that different from other western societies with ageing populations?

Dr Comerford: Scotland and the UK are both in a pretty favourable position compared with most other western societies.

Professor Wright: If you look at the Scottish and UK situations on a spectrum from the most ageing to the least rapidly ageing, we are more towards the least rapidly ageing end of it.

To get back to something David mentioned, pensions are one important aspect of what we call accommodating the ageing population. What we mean by that is to put in place policies that help to ensure that the standard of living of old people does not decline. Pensions are one thing, but so is health expenditure, free personal care or home help. All these things cost a lot of money, and as more and more people are eligible for these services and demand them, you will have big increases in the expectation that the Government are going to spend money to provide them.

The important question is not about pensions, personal care or health; it is all of them added together, and the demand for the Government to pay for these things is going to rise rapidly both for the UK as a whole and for Scotland, and in most other countries as well. Population ageing is a global phenomenon. Every single country in the world is ageing; it is just that the rate of ageing varies a lot. We are not at the positive or negative end; we are somewhere in between, but the challenge is to put in place policies that will ensure older people 20 years down the road on average are not worse off than those people now.

Q4866Lindsay Roy: Can you tell us the variables that are most likely to influence the projections? Which ones are most likely to shift?

Professor Wright: Fertility has been below replacement level in both the UK as a whole and in Scotland for 40 years, and it seems unlikely that we are going to get a big increase in fertility in future. You should be asking not me but 20 year-old women whether they are going to have four children instead of 1.65 or 1.7, which is the average now. It is unlikely that we will have another baby boom, but we missed the last one. Who knows?

For Scotland, the challenge is to reduce the sick man of Europe image where there is a much lower level of life expectancy than there should be, given the socio-economic situation. Some policies are in place, so hopefully this gap between us and almost everybody else will decline. The other big question, which is very topical and everybody has a view on-there is nobody in between-is the impact of immigration on net migration and what it is going to be in future. I will not comment on the current policies of the UK Government at the moment, but in the future the only way the Scottish population is going to grow is if you have quite a sizeable difference between immigration and emigration-more people coming than leaving. This is a result of the population momentum that has built up for five decades. That’s just the way it is.

Most economists and businessmen will tell you that unless you have a growing labour force with the right skills, you are not going to get economic growth. If you do not get the economic growth, you are not going to get the tax revenue, and if you do not have the tax revenue, you are not going to provide the services. Making sure that you have the factors of production that you need to generate economic growth and the appropriate labour is important, and in the future immigration will be critical to that.

Lindsay Roy: That is very helpful.

Dr Comerford: All I would say is that fertility and longevity rates do not vary too much; there are trends in these things. Immigration can vary a lot, so the lever you have to affect population and demography is immigration, almost.

Professor Wright: There is still some confusion about this in the media. What are the causes of population ageing? It is not increases in life expectancy and decline in mortality, and it is not immigration; it has to do with fertility. Fertility is the ultimate driver of population ageing, and it was the reduction of fertility from the peak of the baby boom in the ’60s to below replacement level in the ’70s that has caused this age wave. Once the baby boom generation has died out, the age structure will be much more stable, so in a sense it is a temporary problem, but over quite a few decades. It is not a problem that is going to go on for ever. To a certain extent, call it a middle-term problem, but it is a serious one, because population ageing will accelerate into the future both for Scotland and for the UK.

Q4867Mr Reid: David, do the figures that you gave for the cost of pensions as a proportion of taxes take into account the changes that the Government have already announced in the pension age?

Dr Comerford: No. They were very simple calculations. It was just an average pension cost and average tax per worker, and then running forward with the number of workers and the number of pensioners, although it did take into account the number of pensioners who would be affected by the change in the state pension age. The change to age 66 was included.

Q4868Mr Reid: But not future changes to 67 or 68.

Dr Comerford: And the change to 67, but no further changes after 67.

Q4869Jim McGovern: Thank you for coming along. I have a question for probably both witnesses. There has been frequent use of the word "fertility." Do you mean there are more or possibly fewer people able to have children, or more or fewer people choosing to have more children, fewer children or no children?

Professor Wright: I will clarify this. What we mean by below replacement fertility is a fertility rate of less than 2.1 births per woman. To put it in a nutshell, the UK population and the Scottish population has been failing to reproduce itself for the last 40 or 50 years, so it is a long-term problem.

Q4870Jim McGovern: But is it a fertility problem?

Professor Wright: Ultimately, if you perceive it to be a problem, and the cause of it is low fertility, therefore you can consider low fertility to be the problem, but the only way that fertility is going to fix this problem is to have a big increase in it, which seems unlikely. In fertility, you have a rising share of women with no children at all-being childless. This is a major social trend, and fertility is being concentrated. Fertility tends to be higher among lower socio-economic groups compared with higher socio-economic groups, for obvious reasons, because education is negatively related to fertility, so the ultimate cause of population ageing is below replacement fertility over a long period of time. That is the issue and the momentum has built up. These trends are in place; population ageing will accelerate and how do you deal with it? If fertility jumps to five births per woman tomorrow, those kids would only become workers 20 years from now, so you still have 20 years of the problem. I do not think we can really think in these terms, but we can think of the other things we discussed, like improving mortality rates, managing immigration more effectively and making it easier for women who want to have children and also work-some form of subsidised child care. Some people have argued that in some other countries it does not have an impact on fertility, but it does increase the participation rates of women in the labour market, which in Scotland and the UK as a whole are much lower than in other countries in Europe.

Q4871Jim McGovern: Could I pursue that? For me as a lay person, the word "fertility" suggests a medical term. Is it your case that it is because women or men choose not to have larger families, or is it because they cannot?

Professor Wright: I think that what you are referring to is something called fecundability, which is the biological ability for women to have children. That reaches zero after the age of 50. We are just talking here of fertility as a variable of choice, with people choosing to have no children, or a smaller number of children than the generation before them and the generation before them. In the way we talk about this there is very little medical or biological constraint; it is about choice and thinking about the long term-career prospects, family and trying to make these difficult decisions. On average, people have come down on having fewer children because of this process. I would think it was more or less impossible to convince people to go back to the old ways and have big families.

Jim McGovern: That has clarified it for me.

Q4872Lindsay Roy: That is good clarification on the issue of fertility. Colleagues will pick up immigration. Is there not a moral obligation on the Scottish Government to deal with the root causes of lower life expectancy in Scotland? How easy is it to address that?

Dr Comerford: I am not sure anybody knows why Scotland has lower life expectancy. It is a bit of a puzzle.

Professor Wright: It is a bit of a puzzle. Lots of people have theories and hypotheses. If you look at life expectancy in Scotland almost at any age, 65, zero or whatever, and extract statistically the role of education, income, medical services and all the other things that we tend to associate with mortality differences, they have a mortality rate that is much lower than it should be. It is more like the Czech Republic, Poland and places in eastern Europe than it is in England. There are various competing theories that range from bad weather to bad diet to bad habits related to drinking. There is something called the Glasgow effect, where you can trace disadvantage and focus on that. It is geographically concentrated on Glasgow and, if you fix Glasgow, so to speak, you may fix the problem.

Dr Comerford: Controlling for deprivation and comparing people in Glasgow with equivalent people in Manchester or Liverpool, there is still an effect. It is not deprivation-caused; it is Glasgow-caused.

Professor Wright: That is interesting. I am somewhat optimistic in the numbers I see. Some progress is being made on this, but the way to make progress on mortality disadvantage is, I am afraid, not for people our age; it is for the next generation. The bad habits that some associate with higher mortality in Scotland are learned when you are relatively young. If you can change people’s attitudes when they are young, you will change this problem. I always found it rather strange when this two-year life expectancy difference was somehow turned into an advantage in the discussion on independence, because it meant that if people lived on average two years less you had to pay pensions out for two years less. At the same time, there are policies in place and a wish to close this gap-that is the way to measure it-with the rest of the UK. It is a tough problem.

Another worrying dimension is that, if you look at the ratio of healthy to nonhealthy life expectancy, in some countries, as life expectancy increases, the bias is towards healthy life expectancy. However, the evidence in Scotland suggests that this balance between healthy and non-healthy life expectancy has not changed very much, so people are living longer but in a less healthy manner. I do not have to explain to this Committee the link between ill health and demand for medical and health services. It is quite critical that all those who have the opportunity can contribute to trying to reduce the mortality disadvantage that we have observed in Scotland for a long time.

Q4873Lindsay Roy: I understand where you are coming from, but Scotland has some of the highest life expectancies as well, so it is in pockets. Therefore, it should be relatively easy to address. When I say "relatively easy," with determination and tenacity you should be able to improve life expectancy.

Dr Comerford: You would hope so.

Professor Wright: But the evidence suggests, surely, that inequality and deprivation are related to life expectancy. Even if you net out those factors and control for them in a statistical way, you still have what is clearly some sort of Scottish disadvantage. It is not explained by the simple things that we think explain mortality differences between the United Kingdom and Brazil: differences in income, health services, education levels-all the observables that have been shown to be highly correlated with morality for the last 150 years. David is absolutely correct when he calls it a puzzle.

Dr Comerford: It is not just a puzzle of deprivation; if you compare somebody from Bearsden who is affluent with somebody from Greater Manchester who is also affluent, and you control for the relative affluence, you still see higher mortality in Scotland. Doctors in Scotland are less healthy than doctors in England.

Q4874Lindsay Roy: It is not as simple as deep-fried Mars bars.

Dr Comerford: No, it is not. Plausibly, it could be to do with sunlight. Maybe we should be comparing ourselves with Norwegians and Swedes, and looking at people living at the same latitude.

Q4875Lindsay Roy: Finland showed it was not impossible.

Dr Comerford: Exactly.

Q4876Chair: But we have had 14 or 15 years of the Scottish Government and the Scottish Parliament focusing on health in Scotland in a way that arguably it was ignored before. Are you saying there has been no improvement in that period?

Dr Comerford: I have not looked at the historical position.

Professor Wright: The bottom line is that of course there has been an improvement. Life expectancy has been creeping up in Scotland and growing more or less at the same rate as for the UK as a whole. The lines are just parallel shifts, but there is still the gap. There has not been as much catching up as all of us would like. There is some indication that perhaps there is some catching up, but it is not well understood.

To take the next step, is this because the Scottish Government have put in policies that have been effective? I do not know. There is probably some truth to that, but we still have a long way to go. There is some real social cost to having this mortality disadvantage, so one of the priority areas is to try to fix it, or to try to put in place policies, so that not only does life expectancy continue to grow but we try to close the gap between ourselves and the people-the countries-we want to compare ourselves with, the first of which is the UK. Just because we have the same life expectancy as the Czech Republic, we do not want to compare ourselves with the Czech Republic, because they have a much lower physical standard of living money-wise and health service-wise.

Q4877Mike Crockart: Everything we have talked about so far has been about pensions funded by taxation, because it is the balance between those in employment paying tax and those receiving state pensions, so it is a direct transfer. Are there any similar issues with pensions funded from savings, given the demographics you have talked about?

Dr Comerford: Not really. If you buy an annuity from a private pensions provider, those companies won’t do individual pricing. They will know your postcode and will control for it roughly, so you will get a cheaper pension by virtue of being Scottish.

Q4878Mike Crockart: What do you mean by "cheaper pension"?

Dr Comerford: You get more pension for your money.

Q4879Mike Crockart: Because the expectation is that they will be paying for less.

Dr Comerford: Postcode pricing leads to that.

Q4880Mike Crockart: So there is a benefit.

Dr Comerford: Yes.

Q4881Chair: If I am buying an annuity, I should make sure I buy it while I still remain in Glasgow.

Dr Comerford: Yes.

Chair: I’ve had a piece of financial advice.

Professor Wright: An extremely important point that is often lost in the discussion is that we live in a welfare state. No matter how you want to package up the discussion and the politics around it, the people in work are paying for the people not in work. That is the pay-as-you-go principle, which is basically what the welfare state is built on. In Scotland, the UK and almost all other rich countries, that balance is changing because of demographic change. In the Scottish situation there is a big increase in those who are eligible, and low growth, no growth or negative growth in those who are paying. The system cannot go on like that indefinitely.

There are two other factors that you must think about. One is that we shift away from the pay-as-you-go set-up to a more actuarially fair one, where what you pay in you get out. But when that happens there is a transition period; a lot of people usually get hurt when you change from one system to the other. You can review the evidence in Chile, which did this.

The other deeply worrying thing about Scotland, for me, growing up in a part of southern Ontario where there are more Scottish towns than here, is that savings rates are really low in Scotland. They are really, really low. We have the image of somehow Scots being big savers, but if you compare them with almost anybody else it is a very disappointing record. People are not saving enough and they must be encouraged to save more. I find it very surprising in some of the discussion that for a number of people who are expecting to retire their only source of income will be the state pension and whatever other benefits they are entitled to. That means basically a lifetime of not saving, which is more or less unheard of where I come from.

Q4882Chair: Has any rationale been adopted by people that it is not worth while saving because they are not going to live long?

Professor Wright: There is a moral hazard problem. Any time you are dealing with insurance markets, the moral hazard is that, if you know you are going to get something, you will act differently from the way you will act if you do not. If you want people to work until they drop dead, don’t give them a pension at all. That happens in a lot of countries, as we know. This is clearly the case. I have heard it said on many occasions. The problem is moral hazard. When you have insurance markets or systems like this, you will always get that. The key issue is to try to establish how important it is. I think it is more important than many other people have argued. There are incentives here that lead to lower savings, but there are the same incentives in other countries that have much higher savings rates.

Q4883Chair: The sense of fatalism about how long you might live as a factor in discouraging pension saving might be affected by the geographical parts of Scotland people are in. They would have a higher expectation of living longer in, say, Bearsden, Eastwood and some other parts, as distinct from the east end or the south of Glasgow.

Professor Wright: My feeling is not that people say, "I’m going to live two years less, and therefore I’m going to save less"; it is the whole idea that you are expecting a pension from the state at the end of the day, and you will get that regardless of whether or not you save. It is a pension entitlement. The other mortality disadvantage-"I’m not going to live as long as someone in England, and therefore I’m going to save less"-makes sense logically, but I do not believe people think in that way. They think that at the end of the day, whether they have lots of savings or a little, they will get something from the state-a state pension-and on top of that, some welfare benefits. It will not be a great standard of living, but at least it will be a standard of living that is tolerable.

Q4884Chair: Surely, to some extent people’s attitude towards being faced with the prospect of living on the state pension with some savings and so on would be determined by the standard of living they had beforehand, about what was acceptable and what was not, and in terms of their peer group and so on, would it not? Therefore, allowing for standards of poverty, is there still a Scottish non-saving factor taking all of that into account?

Professor Wright: I do not really know. I look at the standard of living that I have now; David looks at his standard of living. He has some idea of what his standard of living will be for the rest of his working life. We really do not want our standard of living to drop a lot when we retire, so we make decisions based on savings and investment that hopefully will guarantee that. We can get away with it because we have a relatively high income. It is much harder for people with lower levels of income to do that, but the thinking should be the same.

Dr Comerford: I am younger than you.

Professor Wright: I know, but you are on the same growth path.

Dr Comerford: I do not expect to retire.

Q4885Chair: Surely, if people with a lower standard of living are willing, it will be assumed, to settle for a lower standard of living in retiral, when they look at the level of the state pension, they might very well think, "I’m not all that dissatisfied with it," and, therefore, they feel that saving, as distinct from spending at the time, is not a wise proposition, so it is an entirely rational set of choices.

Professor Wright: I do not have a problem with that hypothesis. I just wonder how relatively important it is. How many people are really thinking in this way? I do not know, but as we see in the data, people’s standard of living tends to drop in retirement, but most people do not want it to drop a lot. I do not think there is anybody I have met out there who expects their standard of living to be higher when they retire.

Dr Comerford: A stronger effect than the effect you are hinting at is probably means-tested pensions credit, which really does reduce your incentive to save, because your savings will be taken into account.

Q4886Mr Reid: Will the single-tier pension make a difference to people’s attitude to saving?

Dr Comerford: I do not know. I do not know how well informed people are about it.

Q4887Mike Crockart: What about auto-enrolment? It is enforced saving.

Dr Comerford: It is worth a try.

Professor Wright: There are other countries that do this. My feeling is that you will probably have to do it here, because people underestimate the challenge ahead, with the ageing population and the acceleration of the number of people in the older age groups. There will have to be some drastic measures. Another possibility is to make the state pension means-tested, based more on need and not some sort of right. Is it better to have some people who are rich not getting it so that you can give slightly more to those people who need it? That is a debate that will be coming relatively soon, I think. You can think of other age-related benefits that everybody gets when they hit a certain age. You have to think about whether or not that is a rational way to spend taxpayers’ money. I do not think it is.

Q4888Mike Crockart: The Scottish Government are making the case that effectively they do not have to think about this quite yet, because of the demographics and the slower ageing due to lower life expectancy in Scotland. How far is that interpretation based on real relevant data across the whole of Scotland? How much of it is, as you have already said, taking into account the Glasgow effect? You said that if we fix Glasgow, we might fix the problem. If we take Glasgow out of the equation, does Scotland look pretty much like the rest of the UK in terms of its life expectancy and the problems related to pensions?

Dr Comerford: No, I do not think it does; it is still worse.

Q4889Mike Crockart: It narrows the gap significantly.

Dr Comerford: Yes. If the Scottish Government were to do something on health that reduced the life expectancy differential, or if they did not, it would still be the case that the cost of pensions as a percentage of tax revenues would be higher, though not hugely higher, in Scotland than the UK. The Scottish Government cannot use life expectancy as an affordability criterion for delaying the rise in state pension age. It can use it as a fairness criterion; it can say that a Scot has the same tax contribution history as someone in the rest of the UK, and can expect to live for fewer years and, therefore, it is unfair to that individual for the state pension age to be put up so rapidly.

Q4890Mike Crockart: If you take that to its natural conclusion, you have to have some sort of regional system, where it is only Glasgow that should be benefiting in that way.

Dr Comerford: The Scottish Government are proposing their own regional system and want independence to do that.

Q4891Mike Crockart: But you are then left with the argument that potentially you are giving benefit to some parts of Scotland that others would not get. If you are going to delay putting up the state pension age but you still have people, as in my constituency, whose life expectancy is 84, they are benefiting to a greater extent than the people about whom we are arguing.

Dr Comerford: Yes. A fairer way to do it would not be a regionally-based but an income-based system. You would give the state pension to poor people at a lower age.

Mike Crockart: I am not the one who is arguing for a regionally-based system.

Q4892Chair: Alternatively, presumably you could do it on the basis of how long people have worked. I can think of people in my constituency who were in the building trade or worked in the shipyards and went into those heavy manual occupations when they were 15 or 16. By the time they reach 65 or 67 they are physically exhausted. Their bodies are just worn out, as it were. It would be far more reasonable, would it not, to be doing it on the basis of the number of years people have paid into the system and worked, rather than simply doing it on a geographical basis?

Dr Comerford: That is all plausible.

Professor Wright: There are lots of other countries that have different state pensions depending on the number of years you worked, how much you put in and so on, so you can vary it. To get back to the issue raised here, I find it somewhat irresponsible to argue that it can be more affordable to pay pensions in Scotland because people live two years less and, at the same time, to say, "We’re putting in place policies that will decrease the gap," because if they are successful in one they are unsuccessful in the other.

If you look at the distribution of mortality geographically in Scotland, in and around Edinburgh you get some very high levels of life expectancy, and it is high in some areas of Glasgow. It is not low everywhere. I did some work for the Board for Actuarial Standards a few years ago. We divided up the UK into 600 regions and geographic regions. Of the four lowest life expectancy regions in the UK, three were in Glasgow and one was in Paisley. The bottom four lowest life expectancies in the UK at that time were in and around Glasgow. Clearly, Glasgow is important for this, but if you increase life expectancy, particularly healthy life expectancy, you will also have less expenditure on health. If you have less expenditure on health, you have more money to spend on other things, whether it be to top up pensions or whatever. Dealing with this issue in the best way you can is a priority, but it is not going to happen quickly; it will only happen gradually over a long period of time as young people grow up and do not pick up the same bad habits as their parents, which is one explanation for this.

Q4893Chair: Coming back to Mike’s point, can I be clear whether or not you support, or think reasonable, the view that the Scottish Government have expressed, that they can afford to raise the pension age more than in the rest of the UK because people in Scotland die sooner?

Dr Comerford: We have quantified the cost of the Scottish Government raising the pension age at a point in time at which it achieves the expectation of future life that the UK achieves, at the point at which the UK has decided to raise the pension age. That calculation translates into a 12-year delay in the rise of the state pension age in Scotland, and the cost of that is about half a billion pounds a year.

Q4894Chair: You could delay it for 12 years, assuming that people in Glasgow in particular continue to die sooner. I am not sure I would be reassured on behalf of my constituents in Glasgow that the Scottish Government are budgeting that they are going to die sooner and that is what is necessary to make the books balance.

Professor Wright: That is exactly what is happening. I do not think it is credible to argue in those ways. They also argue that they are going to reduce this gap because they are investing in policies that are supposed to increase life expectancy, with the goal of catching up to the countries they want to be compared with. The main one they want to be compared with is the UK as a whole. As I said before, if they are successful at one, they will be unsuccessful at the other because they are tied together. As David said, you can do the calculations that over the next 40 years there is a catch-up in mortality; both are growing and Scotland catches up with the rest of the UK as a whole. You still do not have big differences in the growth rate of the number of people aged 65 and the number of people aged 85, or whatever way you want to measure someone in the older age groups, because, as I said, from day one, population ageing is driven mainly by fertility, not mortality. We have to keep that in mind; there is a limited range of variability outside the fundamental cause of this.

Q4895Chair: David, do you want to come back on that?

Dr Comerford: Going back to your question, if you condition the state pension age rise not on the basis that, "We will raise it in 12 years’ time," but, "We will raise the state pension age when average mortality is such that it has reached the level to which the UK Government have already raised it," the objectives of the Scottish Government are not really in conflict. They want to raise longevity, but if they achieve it they will save some money because they will put up the state pension age.

Q4896Chair: I can understand the distinction between Scotland and England, but surely that is enormously discriminatory within Scotland, because there are parts of Scotland-for example, my constituency-where people will be dying much earlier and will be getting very little benefit from that, but there are parts of Scotland like Mike’s constituency where people will be getting a pension for a much longer period than their social equivalents in England and Wales.

Dr Comerford: That is exactly what you could level at the UK Government at the moment for raising the state pension age.

Q4897Mike Crockart: David, in response to the last question you said you could make a fairness argument for why the Scottish Government could do what they wanted to do but not an affordability argument, but we seem to have been arguing about affordability questions.

Dr Comerford: The affordability quantification is about half a billion pounds, so if the Scottish Government want to say that on the basis of fairness they want to do this, it will cost them half a billion pounds. In the context of a £50 billion public sector in Scotland, half a billion is costly and difficult but not beyond the realms of possibility.

Q4898Mike Crockart: This is not a cost-neutral exercise.

Dr Comerford: No, it is never a cost-neutral thing.

Q4899Mike Crockart: It is easy to see how it could be thought that, if you are dying earlier and you start paying it a bit earlier, you end up pretty much in the position where you started. But there are extra costs.

Dr Comerford: For the costs on an annual flow basis, life expectancy does not come into it at all; it is the number of pensioners against the number of taxpayers. The future life of one of those pensioners matters not a jot.

Q4900Mike Crockart: So the fact that you have those extra pensioners who would still have been in the working population means that you are losing from one and gaining on the other side, so the equation is massively unbalanced.

Dr Comerford: Yes.

Q4901Mr Reid: We have heard that the demographic in Scotland is such that pensions would be paid out for less time, and therefore there is a saving compared with the UK as a whole, but do other factors come in because of the Scottish demographic that mean more public spending, for example, on health and welfare payments?

Professor Wright: It is certainly the case that this lower life expectancy-this rather unimpressive healthy life expectancy period-is very expensive, because of course it draws on health services. In Scotland, we have been debating for some time about free personal care. What is the benefit of subsidising this and giving it to everybody for free? There are two benefits. If you give it to everybody, you do not have to administer it and hand it out in a means-tested way, but if free care for the elderly was not there those services would have to be provided somewhere else-for example, in a hospital. Everybody seems to agree that it is much cheaper to keep people in their homes if you can, plus people themselves actually want this. Some countries have policies in place that people want, but the overall cost of accommodating the ageing population is the important one. It takes into consideration health and all these other services. When you start to think in those terms, in the work we have done the skyrocketing cost of accommodating an ageing population is not very happy reading, and it is going to be a real challenge. Pensions are just one aspect; health spending and subsidising personal care are other aspects, and they all add up.

The other point about raising entitlement to the state pension is that it will force more people to work. One thing we see with Scottish demography, which is different from the UK’s, is that labour force growth is going to be much lower, if not negative, depending on the assumptions made about net migration, so it is a priority. Those people who want to work should be allowed to work, and in some situations people who do not want to work, or would not have to work if the pension age was younger, are going to have to work. They will not be very happy, but we need to increase participation rates, particularly of older people and women. Any policies you can put in place to do that should be encouraged. There is a good debate going on in Scotland now about the role subsidised child care would play and what that would mean for growing the labour force from within.

Q4902Chair: Can I clarify growing the labour force? At the moment, I have 12% male unemployment in my constituency. The need to increase the labour force by making people work longer is therefore not immediately apparent. How do these two things mesh together?

Dr Comerford: I think it is to do with a mismatch of skills and vacancies. Growing the labour force, if that labour force consists of an uneducated population mass, is not a good idea. We need to make sure that we grow a skilled labour force, which means for the people in your constituency that we do not want to multiply the numbers who look like that. We want to multiply the numbers coming out of colleges and universities.

Professor Wright: That is absolutely right. You should think about the situation as having two sides. There are the firms with specific requirements, and there are the people who potentially supply their labour. You have a group of people in Scotland who do not have much in terms of a skill base and that nobody, more or less, wants to hire. That is why you get a situation where the labour force may not be growing at all and you still have a rather large number of unemployed. It is to do with what we call a skill mismatch. When we have these discussions, we usually point our finger at the failure of the higher education system and so on. We can go into that discussion if you like, but I am sure it is being taken care of in other Committees. You should not in a sense automatically assume that everything is rosy on the labour supply side just because you have a lot of unemployed people in groups. Unfortunately, I cannot see them ever being employed, because they do not have the right skills and other characteristics, and people do not want to hire them.

Q4903Mr Reid: Is that labour force mismatch worse in Scotland than in the UK as a whole?

Professor Wright: The only evidence I have is some work done by James Heckman of the University of Chicago. He came over and was very surprised to see the proportion of people in this category. It makes Scotland somewhat atypical compared with many other countries. He demonstrated that empirically and he found it very surprising.

There is a dilemma. One view is that, yes, we have these people and we need to retrain them and provide them with skills to make them employable so that they will be in demand. We have been doing this for 30 or 40 years and have not had much success at it. Some people say that these retraining programmes are just wasting taxpayers’ money because, at the end of the day, they do not improve the employability of these very low-skilled people enough to make them employable in the highly technological society we live in today.

What do we do? Some people say that, unfortunately, we have to forget about this group; pay them a living wage but, at the end of the day, make sure that we provide the workers who are demanded by the firms and the Government who are creating the wealth that generates our standard of living. This is well known, and it is a tough nut to crack. Nobody has been very successful at it, even Sweden. Despite all the policies they have there, they still have an unemployment rate that is far away from zero. They have a similar problem but not on the same scale. There is always a group in society that is unemployable. I am afraid that, by the sound of it, a large percentage of that group are in your riding.

Q4904Lindsay Roy: Can I challenge that view? In my local authority in Fife, five years ago there were 40,000 students in further education. Today, there are 60,000, and, rightly and understandably, the focus is on 16 to 24 year-olds. A 24 year-old-plus cannot get courses to upgrade and upskill. Rightly, we invest heavily in academic education; we have a proud record there, but we certainly do not have a proud record in developing skilled technicians, engineers and so on, and we need to do something about it. Would you agree?

Dr Comerford: I wouldn’t disagree.

Chair: Is that different from agreeing?

Q4905Lindsay Roy: That is called damning with faint praise. There is not a big group that is unemployable.

Professor Wright: I don’t agree with that. You are right to a certain extent; if you look at what has happened in Scotland over the last 20 years, there has been a big increase in participation after basic qualifications and what I would call high school, but the big growth has been in higher education, and further education in a sense has not grown as rapidly and has suffered. It is the neglect of further education and the priority of higher education that is causing what we call an over-education problem. A large percentage of Scots-domiciled higher education graduates leave Scotland, and my research shows that the main reason they leave is that they cannot get a graduate job in Scotland. Maybe we need to think about the balance between further education-middle-skill education-higher education and higher skill education. Maybe we have got that balance wrong, and some people say we have. There is clear evidence that Scotland is losing a lot of young people because of the problem of finding a graduate job with a graduate education.

Q4906Mr Reid: It would seem a fair assumption that, if the health situation is worse in Scotland than the UK as a whole, more money will be paid out in Scotland in benefits such as employment support allowance and personal independence payment to people of working age, because of disability and inability to work. Has any research been done to quantify that?

Dr Comerford: The IFS has numbers on benefit payments. The overall level of benefits in Scotland is 102% of the UK average. If you break that down, it is a bigger increase in disability, and a lot less in housing benefit.

Professor Wright: If you look at long-term disabled rates, they are much higher in Glasgow than the UK as a whole, but less than we see in Northern Ireland. Some people argue that with a less healthy population you might expect these rates to be higher, but then some will argue that, no, it is to do with the incentives built into the benefits system. There is that argument about which is more important, but as David mentioned, it is not a big difference in terms of the average for rich countries.

Q4907Mike Crockart: You said 102% of benefits. What are you counting within benefits? Obviously, benefits take in pensions.

Mr Reid: Working age?

Dr Comerford: I am not entirely sure. I suspect that it is almost everything-all the stuff that is administered by DWP.

Q4908Mike Crockart: Working age benefits, not disability or pensions.

Dr Comerford: It might be working age benefits. You will have to look up the IFS stuff.

Q4909Mr Reid: Am I right in assuming that all your studies have been based on people living in Scotland as opposed to people living in the rest of the UK? The reason I ask that question is that, after independence, it is legally possible that people living in Scotland could choose to retain their UK citizenship and, therefore, would be entitled to a pension from the UK. Alternatively, people living in England who were born in Scotland could choose to take out Scottish citizenship and get a pension from Scotland. Is there any way of factoring that into the calculations?

Dr Comerford: Briefly, probably not. Who knows what the assumptions are going to be? Those choices will be made on aggregate. I do not think we have any reason to suspect it would not be just the population split as it is, as a best guess. But you are right. Who actually knows?

Q4910Mr Reid: Presumably, if Scotland had a more attractive pension system than the UK, there would be an incentive for people to try to get a Scottish pension rather than a UK pension, or vice versa. Is that something you think is likely?

Dr Comerford: Considerations like that probably mean that an independent Scotland would choose exactly the same.

Professor Wright: There is a good case study where this has happened. The province of Quebec has much more responsibility for governing these matters than any other province in Canada. All the other provinces have one CPP.

Q4911Mr Reid: CPP is?

Professor Wright: Canada pension plan, which is the same as your state pension. Quebec manages their own state pension and it is the exact same amount-the exact same benefit. Everything is the same except that they manage it, and that is what they want. It is rather surprising that the yes side lost by only half a per cent and there has not been another referendum in Quebec for almost 20 years, because basically what they got was better than independence. They control the things that matter to themselves, and they still enjoy the benefits of being in a larger, richer country. There is always the discussion that there are going to be movements from one place to the other because welfare benefits are better. Remember that when we had free personal care introduced in Scotland, we would have a big wave of older people from England, Wales and Northern Ireland coming to benefit from it. It has not happened, because it is not one of the main factors.

Q4912Chair: Surely, the question of access to pensions is slightly different, on the basis that if you were able to qualify for a higher Scottish pension it would presumably not be an obligation that you had to remain living in Scotland. Therefore, the number of people who might choose to claim the higher pension but be somewhere else makes it not quite a parallel along the lines you are indicating.

Professor Wright: The Government have to make a choice with respect to pensions. Do you have to live in the country to get your pension, or can you live somewhere else to get it? In a sense, you want to pay pensions to people living in other countries because, if you do that, the other expenditure that you have does not apply. What you really want is a lot of old people to move to Spain because they will put pressure on the Spanish health system and you do not have to pay for it. Spain is waking up to this. That is one way of thinking about it.

The other is whether there is a real differential. There will be some transitional period if Scotland becomes independent, where, as you rightly say, you could pick and choose where you want to live and which country you want to get your pension from, but there will be a cut-off and a set of rules, and those rules will apply. One thing that is neglected in this debate is the transition cost of what it means to move from being part of one country to becoming a separate country. These costs tend to be big. For reasons like that, these issues have to be sorted out and rules put in place. You may get some outcomes that were not expected, but I would be surprised if soon after independence there were any big differences between the state pensions paid out in Scotland and the rest of the UK.

Q4913Chair: But the Scottish Government have said that there would. Part of the reason why they want separation is in order that they could change the pension age.

Professor Wright: That’s right. My understanding of what they said is that they may not-may not-have to raise the entitlement age for the state pension following the sequence that has already been laid out for the UK as a whole.

Dr Comerford: I think the only promise they have made is to establish a commission.

Q4914Pamela Nash: The Scottish Government have said that they would increase inward migration to Scotland in the event of independence, and that this is required in order to fix their economy, as it were. Do you agree that that is what is required for Scotland at the moment?

Dr Comerford: An ageing population is a problem for the whole western world. One of the only feasible solutions is to expand your working age population. Increasing immigration appears to me to be the only lever you have to achieve that, so, yes, I would say that increasing immigration should be a target for improving the economy.

Q4915Pamela Nash: Do you have any idea of the level you would put it at?

Dr Comerford: In the paper we produced, we looked at state pension cost as a percentage of tax revenues, and it is slightly higher in Scotland. Removing that differential between Scotland and the UK can be achieved roughly by using the ONS high migration projection instead of using its principal projection. The difference in net migration is about 8,000 or so per annum. If you look at that as a percentage of total immigration over the past decade, it equates to an increase in immigration of about 10%. It does not sound completely unfeasible to me to close that gap, but it does not address the ageing population problem; it just addresses the differential between Scotland and the UK. A 10% increase in immigration sounds okay.

Q4916Pamela Nash: I do not have it in front of me, but I take it to mean that the Scottish Government are not just arguing to put it at the same level as the UK; they want to fix it.

Dr Comerford: Sure. The UK should look at the figures we have produced as well, and think about a rise in the amount of your taxes devoted to pensions of 50%. You are increasing that amount by one and a half, so increasing immigration should be a priority for Britain as well.

Professor Wright: We have done some work along the same lines. I will put it in a slightly different currency. The current level of net migration is about 25,000, and it has been like that for four or five years. Our estimates say that you will probably need to double that: 50,000, which is 1% of the population. That is a very high rate. I do not want to be negative, but it means that we are not going to solve this problem through immigration; it is not going to happen, because the number to solve the problem, according to our work, is a very big number and unfeasible.

You have to think about this from a variety of different policies. You have to think about your skill mismatch problem. You have to think about how to break the mindset that somehow public services have to be provided by public employees. If there are efficiency gains by privatising these things, you should do it. There is a host of things that you should be thinking about doing; immigration is one of them. For example, the number of young people in Scotland is going to decline. This means that probably you should be able to save money on schools because you can close some of them. My rule is that, for every new school you build, you close three and you bus students around much more, and things like this. Do not focus on just one aspect of this. You have to think of the larger picture and a series of things you can possibly do to accommodate the ageing population, but in most other high-income countries immigration is seen as an important feature of that. That is why a lot of other countries have a much more economically focused and rational immigration system that scores people on their employability. If they have high levels of skill and employability, they are welcome; if they do not, they are not. That is the way to think about it.

Q4917Chair: You said you thought there were several solutions. You thought that this could not be resolved by migration alone. You were proposing the privatisation of public services and substantial numbers of school closures. Neither of these is likely to be responded to with great enthusiasm by the Scottish Government. If those two were ruled out, what sort of figure of migration would be necessary if migration was seen to be the main route to resolve this problem?

Professor Wright: It would be considerably bigger than 50,000 per year, which is double the current level of net migration.

Q4918Chair: What does "considerably bigger" mean?

Professor Wright: We looked at net migration of up to 50,000 a year, and in our analysis we still saw big welfare losses and big reductions in the standard of living-in our model.

Q4919Chair: What is necessary in Scotland to fix the problem?

Professor Wright: Some people, including my colleagues, argue that it is not fixable. You can expect the standard of living of older people to fall. Other countries have accepted that that might happen, but if you start to think along the lines of what I just mentioned, a mix of policies, you can look for areas where you can make savings.

Q4920Chair: I understand that, but I am saying to you that it is highly unlikely that a Scottish Government in the near future will run for election on a programme of mass privatisations and school closures. In those circumstances, if those are ruled out, you have already indicated that 50,000 would only scratch the surface.

Professor Wright: I did not say "scratch the surface." I do not know. I did not do the analysis up to the magic number, because in reality it is going to be a mix of policies.

Q4921Chair: I am not clear even about the range that the magic number might be in, but I am quite clear about what I am seeking to get from you: if that is the main tool used, what level would be necessary?

Professor Wright: I do not know, because we have not done research that identifies that number. What research we have done says that double the current rate of net migration is not enough. That is the finding.

Q4922Chair: By how much is it not enough?

Professor Wright: Don’t know. Not sure.

Q4923Chair: That’s why you’re here, you see-to answer these sorts of questions.

Professor Wright: Not really, no. Everybody realises that there is no magic bullet to this. There is not one solution; there is not one fix. It is going to be a mix of policies addressing issues that we have discussed thoroughly today. These will be very politically difficult decisions to make, but the choice is do you want, or how much will you allow, the standard of living of your older population to fall? It is like the lesser of two evils. Do you bite the bullet as Germany is doing: make these tough decisions and become politically unpopular but have fewer problems with the ageing population?

Q4924Chair: I understand that, and I understand that closing schools and privatising public services would be tough decisions. I also understand that increasing immigration by substantial numbers would be a tough decision as well, but for that one I am not clear how tough it might be, in the sense of what numbers are involved. You said 50,000. I am not sure whether or not in order to solve the problem using that tool alone it would be 5 million, 2.5 million or 500,000.

Professor Wright: It is unlikely to be 5 million because the population of Scotland is only 5.3 million.

Chair: Right, we’ve clarified that.

Professor Wright: If you look at the current level and double it, it is still not enough; you still have these welfare losses and you still have a reduction in the standard of living. You can ratchet up the number, but it is going to be a big number.

Q4925Chair: But it is less than 5 million. At the moment, we are between 5 million and 100,000.

Professor Wright: The other thing is that the number will depend on how successful these other policies are. The more successful the other policies-

Q4926Chair: Which we’re not accepting. For the purposes of this discussion, we have agreed that we are not accepting the other policies you mentioned about privatisation and mass school closures.

Professor Wright: David looked at it in a slightly different way, so maybe he can assist.

Q4927Chair: So David’s going to answer it. Where are we between 5 million and 100,000?

Dr Comerford: I can give you an estimate. Let me do some mental arithmetic. I reduced the state pension cost per unit of tax by 0.8% by increasing net migration by 8,500. The actual gap to keep the state pension cost as a percentage of tax revenues at today’s level is about 6%. Therefore, you are talking about six divided by 0.8, times 8,500.

Q4928Chair: Okay. One of the staff will work that out for me later. That said, I think the figure is probably between 100,000 and 5 million.

Dr Comerford: No; it is less than 100,000.

Q4929Chair: That was what I thought, so you disagree with Professor Wright when he says it is 100,000.

Dr Comerford: By implication, yes.

Professor Wright: We can run 100,000 through the model.

Q4930Chair: Normally, we quite like to have panellists disagreeing because it helps to illuminate, but we are not getting much illumination here. When people in Scotland come to vote, they have to be given some idea about what the alternatives are. Professor Wright, I understand completely that there would be a range of things: privatisation, substantial school closures and increased immigration. We can give people two of them, but not the third. We want to publish something saying, "This is the range of choices you’re going to have to face." We are not going to make a recommendation about which they should accept, but we have to give them some sort of indication about what figures might be necessary in the event of independence.

Dr Comerford: Can I jump in here and make it clear that most of the ageing population will be there under no independence as well, so almost all of that has to be done anyway?

Q4931Chair: But my understanding was that the rate of immigration in England and Wales was much more substantial at the moment than in Scotland, and therefore there was a degree of fiscal transfer taking place from England to Scotland under the existing regime which, if it continued, would tend to mitigate the effect of Scotland being in isolation and simply having to balance its own books.

Dr Comerford: The state pension cost per unit of tax revenues goes up to about 17% in the UK as a whole, so all the stuff Robert talked about has to be done in the UK as well.

Q4932Chair: So where are we between 100,000 and 5 million?

Dr Comerford: Multiply it by 12 as well.

Lindsay Roy: Pick a number.

Q4933Chair: It is basically pick a number, isn’t?

Professor Wright: Not really.

Dr Comerford: A sensible number.

Q4934Chair: What is a sensible number?

Dr Comerford: For the UK or for Scotland?

Chair: Scotland.

Dr Comerford: Sixty thousand.

Chair: Sixty thousand a year.

Dr Comerford: Yes.

Q4935Chair: For the next how long?

Dr Comerford: For the whole period of the projection, until 2050 or 2060.

Professor Wright: The next five decades.

Q4936Chair: That is the sort of figure that would be needed to make the Scottish age dependency ratio equivalent to that in England.

Dr Comerford: No. That is the figure that would be needed to keep the Scottish age dependency ratio the same as it is now.

Q4937Chair: If it was being done to keep it the same as it is in England, what would that be? It would be larger.

Dr Comerford: It would be 8,500. That is the figure I calculated as the one to keep it the same as England, which is an increase in net migration of 8,500.

Q4938Chair: It may be that we will write to you and say that we are still not clear once we have looked at it.

Dr Comerford: I can supply that.

Chair: By coincidence, you have it there. I must say we expected a bit more precision from somebody wearing the tie of the Scottish Economic Society, if I may say so, but maybe we will come back to you on that.

Q4939Jim McGovern: I was interested in what Robert said about looking at the bigger picture, and relating that to something David said about increasing the working population in this country to maintain benefits. What happens to the countries that we are taking people from?

Dr Comerford: Fantastic question. This is a very self-interested argument.

Q4940Jim McGovern: It is parochial.

Dr Comerford: Yes.

Professor Wright: I have argued this for a long time. If you think of Scotland with 5.3 million and the potential world supply of people who want to move to Scotland, Scotland is a drop in a bucket, so the number of people we need in Scotland relative to the number available is trivial. You need a system that attracts people, which we do not have in Scotland. I do not think the UK model is very effective.

In my view, what you do not want to do is go into countries like those in eastern Europe, with whom you are in an economic relationship, and strip out their young workers and bring them to Scotland where they end up in jobs that are well below their skill levels, which leads to short-term migration. You will just end up paying for that anyway because of the economic relationship we live in within the EU. That is why we have to look further afield and why all the immigration from the A8 countries we have welcomed to provide the services that we all want and so on is not a long-term solution. First, I do not think it is ethical to do that, and, secondly, there is not an unlimited supply of young people in those countries. Their populations are ageing rapidly. The number of young people is declining at rates higher than here, so you have to look further afield. This is why you need a system in the UK that is more effective at competing for people in the international labour market, not going out to Poland to see if you can find 30 or 40 bus drivers, which are some of the policies that have been pursued in Scotland.

If Scotland was an independent country it would have to have its own immigration system and an immigration policy to deliver it, but that is not impossible to do even if it stays as part of the United Kingdom; there are countries out there that have in a sense devolved to a large extent the responsibility for immigration to provinces or territories-for example, Canada. The responsibility for immigration can be shared between different levels of government. It has been like this in Canada and Australia for many decades. It is just a matter of political will to make the immigration system work better and more rationally and generate the number of people that are needed to make sure that the labour force grows at least at a minimal level.

Chair: But at some stage you would have to clarify what the number was, and-

Jim McGovern: But is it socially responsible to expect-

Professor Wright: I am sorry; I can listen to only one person at once.

Jim McGovern: I think I was holding the floor.

Chair: Okay.

Q4941Jim McGovern: Is it socially responsible to expect 60,000 people to come to Scotland per year and not worry about the implications for the countries they are leaving?

Professor Wright: Personally, it depends where they come from. This is a complicated issue. There is an over-education problem in lower-income countries, where education is seen as the way to improve yourself but there are just not the jobs or demand there. The best example is doctors in India. There are lots of doctors in India but there is not the demand there because it is not socialised medicine, so you have to pay. It is better off for doctors who emigrate, and they also send remittances, so in a sense it is better off for the country they left. It depends on where the people you attract are coming from and why they are coming.

I think it is socially irresponsible to go to a country where you are involved in an economic relationship and poach their young people, put them in jobs well below their skill level and somehow think this is a successful economic policy. It just is not. This is why countries that take immigration seriously, and have done so for a long period of time, have a system that sets their hurdle high. It is very difficult to immigrate and a lot of effort goes into it. When they arrive in that country they want to be there and the vast majority stay, and we do not have the big turnover we currently see in Scotland and the UK where people from the A8 come for a short period of time, do not invest here, sometimes do not even bring their children and then go back. It is a convenient but not long-term policy of immigration to pursue.

Q4942Mr Reid: Would the choice of currency used in an independent Scotland have any impact on the calculations?

Dr Comerford: Not on the calculations we have talked about so far, but I was given a clue as to what some of the questions might be, and certainly questions to do with any liquidity premium that Scottish bonds would attract and who might be able to take advantage of that liquidity premium. If Scotland had its own currency, Scottish pension funds who had liabilities denominated in the Scottish currency would be the natural holders of Scottish bonds. If Scotland uses sterling, it is not clear who the natural holders of Scottish bonds are.

Q4943Mr Reid: What are the implications of that lack of clarity?

Dr Comerford: If Scottish pension funds own Scottish bonds because they have liabilities denominated in Scottish currency, the rate on Scottish bonds could be deemed to be risk free and could be used for discounting the pension liabilities.

Q4944Mr Reid: But not if Scotland was using sterling.

Dr Comerford: If Scotland was using sterling, probably the bonds issued by the rest of the UK would be deemed risk free, but there are institutional complications; perhaps the Scottish bonds would be risk free if they had an agreement with lenders of last resort and things like that.

Q4945Mr Reid: What would happen without an agreement?

Dr Comerford: Clearly, there is a risk about the solvency behind these bonds.

Q4946Mr Reid: Does that mean that Scottish pension funds would be taking out bonds from the UK Government?

Dr Comerford: If Scottish pension funds had liabilities denominated in sterling, it is not clear that they would have a particular appetite for Scottish Government bonds. They might; they might offer a better return or attractive features, but it is not an obvious, natural investment.

Q4947Mr Reid: What would be the practical implications of Scottish pension funds not taking out Scottish Government bonds but going to, presumably, the UK?

Dr Comerford: The practical implications for whom-the Scottish Government or the pension funds?

Mr Reid: For the pension funds.

Dr Comerford: I suspect they would see very little difference from the current situation.

Professor Wright: To look at it in a slightly different way-and this is a very good example of the issue-if you have high rates of economic growth, you have high rates of tax revenue and therefore you can accommodate an ageing population. You can pay for anything if you have enough money to pay for it, and the only way you are going to get enough money is to have high rates of growth. The problem about currency is that it increases the cost of trade if you are trading with a country with a different currency. Transaction costs lead to lower growth so it is important, because growth is what matters here. You have a period of time until the baby boom dies out when you have to make sure, or you would like to make sure, if you are a responsible politician, that the standard of living of that group does not fall. The only way you are going to get that is to think creatively, try to make sure you do all you can to maintain growth and make some tough political decisions.

What currency do you use? If you do not use the pound, you use the euro. You reduce the transaction costs of trading with the rest of the European Union, but then you increase the cost of trading with the rest of the UK, so what is the balance? It is extremely important. The transition period that nobody talks about is a lower growth period. We know from research that, when one country splits up, there is a period of low growth in between, and after that there are lots of different paths. Some paths are low growth; some are high growth. If you look at the Czech Republic and Slovakia, they are rapidly growing countries, but they certainly had problems when they separated. Their currency union lasted three weeks.

Q4948Mr Reid: If Scotland was out of the EU for a temporary period, would that have any significant implications?

Professor Wright: It depends on whether their trade relationships are allowed to carry over. If all of a sudden Scotland becomes treated in the same way as Canada or Australia is treated by the EU, you will have much lower growth. There is no doubt about that. That is why it is very important that the period of time when we are out in the wilderness and the courts are arguing about it is as short as possible, but who knows?

Q4949Chair: On that happy note, let me come back to the point I made informally to you before you came in. Are there any answers that you had prepared to questions we have not asked, or any issues that you think we have not covered that are relevant to the areas we have been discussing?

Dr Comerford: I had prepared a bit on the liquidity premium that small country debt issues might attract. Would you like me to talk about that?

Chair: Yes.

Dr Comerford: In November, the National Institute for Economic and Social Research released a paper that said Scotland as a small country would likely attract a liquidity premium on its debt. This seems to me to be a plausible thing to claim, but the counter-balance is that somebody receives that liquidity premium. This is not a risk premium; there is no risk attached to these cash flows. The liquidity premium reflects search costs and transaction costs. Suppose you held a portfolio of Swedish kroner and you wanted to swap them for New Zealand dollars. You would be very unlikely to come across somebody who would sell you New Zealand dollars for your Swedish kroner. What you would likely have to do is sell your kroner, buy US dollars and then sell your US dollars to buy your New Zealand dollars, so you incur double the transaction costs, because you cannot go direct. It increases the number of transactions that you have to do.

For this reason, active investors do not like issues from small countries, so there is reduced demand for these cash flows. Cash flows can be as certain and risk free as from a large issuer, but by virtue of being a small issuer there is reduced demand for them, which means that buy-to-hold investors such as pension funds, which know pretty much exactly when their liabilities fall due, can buy these cash flows at a cheaper price, so they get to make money out of this deal. If Scottish pension funds are the natural holders of Scottish Government debt, because of the issues that the national institute raised, the costs for the Scottish Government go up on debt repayments, but it might be another section of the Scottish population who takes the benefit of that. In our paper we also made that point.

Professor Wright: Even though today was mainly about pensions, I want to stress that, in looking at accommodating the ageing population and health and personal care, it is the larger pictures of policies that you have to consider. It is not one single policy that is going to solve this problem, if it is solvable; it is going to be a series of policies, and it is going to take a considerable amount of political will to put some of these policies in place.

It has happened in other countries, and we can learn from them. I wish I could be more positive about the research we have done in terms of the welfare loss, but it is not a pretty picture; it’s not a happy story. The longer you talk about these things and the longer we wait, the more difficult the problem is to address, because population ageing is accelerating and the momentum is there. It cannot be changed. I think it is now time to make some tough decisions to address this as best you can.

Chair: On that cheerful note, we will call the meeting to order. Thank you very much.

Examination of Witnesses

Witnesses: Martin Potter, Leader of the Scottish Board, Institute and Faculty of Actuaries; and David Wood, Christine Scott and David Davison, Institute of Chartered Accountants Scotland, gave evidence.

Q4950Chair: Lady and gentlemen, welcome to this meeting of the Scottish Affairs Select Committee. As you are aware, we are looking at the possible impact of separation on Scotland and trying to clarify a whole number of areas in order that people in Scotland can be aware of the consequences of a vote, in whichever direction they wish to cast that vote. Today, we are looking at questions relating to pensions and similar matters. Could I start off by asking you all to introduce yourselves, give your backgrounds and tell us what qualifies you to speak on this subject rather than any other?

Martin Potter: My name is Martin Potter. I am the leader of the Scottish Board of the Institute and Faculty of Actuaries. I am a partner of Hymans Robertson in Edinburgh, so I spend my day job advising trustees of pension schemes.

Christine Scott: My name is Christine Scott, assistant director of pensions at ICAS. I am secretary to the ICAS pensions committee, which produced the two papers on behalf of ICAS.

David Wood: I am David Wood, executive director of technical policy at ICAS. I am responsible for a range of subject areas, one of which is pensions. ICAS has 20,000 members, many involved in advising on pensions from accounting firms, other professional firms and also acting as trustees.

David Davison: I am David Davison. I am an owner and director of Spence & Partners, which is an actuarial consultancy. I am on the ICAS pensions committee, and also spend my day job advising trustees, employers and members on pension issues.

Q4951Chair: Martin, presumably this is a question for you. First, maybe you would outline for us what ICAS has been trying to do to date to illuminate the issues surrounding pensions, and anything else you are proposing to undertake between now and the time of the referendum itself.

Martin Potter: If it is all right with you, I can tell you what the Institute and Faculty of Actuaries has been doing, but I cannot speak for ICAS.

Chair: Sorry, I confused my organisations.

Martin Potter: The Institute and Faculty of Actuaries is a membership organisation, as you know. We have 25,000 members worldwide, of whom 43% work overseas. We have been engaging in the question of the referendum with an eye on our obligations under our royal charter, in which it is very clear that we have an interest to the public. The way we have been executing it is that in areas where we are experts and actuaries working in insurance, pensions and investment, we have been asking questions about Scottish independence-what it might mean and what the implications are-and trying to educate and inform the debate. That has been the approach we have taken to engage with stakeholders and ask questions.

David Wood: We have been taking a very similar role. We are a public interest organisation as well. We have been trying to inform the electorate as to the right questions. We have issued so far two papers on taxation. We are shortly going to be issuing another one, and we are publishing some research on some tax issues in a couple of months’ time. We have put out two papers on pensions. There was one last year, and we appeared before this Committee shortly after that. The latest paper is looking at whether our questions have been answered. We raised a number of questions last year, and we have done a fairly detailed analysis as to whether the Scottish Government and the UK Government have answered those questions.

Chair: Hopefully, we will cover some of those questions during the discussion this afternoon, but, if at the end you feel there are questions you have not answered or that we have not asked you about, maybe you can tell us then.

Q4952Graeme Morrice: There is considerable concern about what may or may not happen to pensions, whether state pensions, public sector pensions or private pensions, if Scotland becomes independent. As we know, the state pension is paid out of the public purse across the UK. In the event of independence, how could the liabilities for paying the state pension be divided between an independent Scotland and the rest of the United Kingdom?

David Wood: That goes into the broader question of negotiations on the opening balance sheet for Scotland. Undoubtedly, there will be some sort of fair and equitable basis for splitting the liabilities, especially unfunded ones. I think that will be a starting point for the negotiations.

Q4953Graeme Morrice: Martin, is there anything you want to add to that?

Martin Potter: I think that is right. It is worth noting that the Scottish Government have suggested in one of their pension papers how they intend to approach that problem, which is to say that, on the basis of residency at the time Scotland became independent, they would take responsibility for the pensions people had built to that date and then accrued in Scotland going forward, and for anyone outside Scotland that would fall to the rest of the UK to deal with.

Q4954Graeme Morrice: You said earlier that it would be down to the Scottish Government to tackle this as a problem, so you see it as a problem.

Martin Potter: I would agree with David. The Scottish Government’s pension papers are statements of intent. It would absolutely need to be negotiated and confirmed that that was agreeable to both sides and not assumed that is the absolute outcome.

Q4955Graeme Morrice: It is more assertions than stated facts.

Martin Potter: I think the Scottish pensions paper issued by the Government in September was a very comprehensive document on how pensions work in the UK at the moment, and there was a lot of statement of intent and reassurance set out there, for obvious reasons.

Q4956Graeme Morrice: Christine, I think you wanted to come in.

Christine Scott: In dealing with the regulatory issues, there is a question around citizenship and the fact that there may be some options there. "Scotland Analysis" published a paper in January which was connected to the Treasury. That mentioned that the question of whether Scots could take UK citizenship would need to be looked at or decided upon later in the proceedings. I think citizenship may well affect who pays your pension, or whether you might have a choice in the matter, so it might not just be for the Scottish Government to take on that responsibility.

Graeme Morrice: There are a lot of unknowns and uncertainties.

David Davison: The other thing is the difficulty of evaluating it. There are different ways of evaluating pension liabilities as well, so there would be quite a significant degree of negotiation over the costs of those liabilities and where they sit.

David Wood: I would question whether the basic data are there as to the split between Scotland and the rest of the UK to enable that calculation to be done as the starting point for negotiation. Are the data there? Do they have the integrity to be used as the basis for this calculation?

Graeme Morrice: At the end of the day, it is down to negotiations. There will have to be give and take, so all the assertions in the Scottish Government’s White Paper are exactly that.

Q4957Mr Reid: You seem to be suggesting that before independence happens decisions will have to be taken about which Government is responsible for paying out pensions. Does that mean that the Scottish and UK Governments will have to write to every UK pensioner before independence day and ask them which country they wish to pay them their pensions after independence? Would that have to happen?

David Wood: I think the Scottish Government’s guide to independence suggests that for people living in Scotland on the date of independence they would pay the state pension from that date onwards.

Q4958Mr Reid: But say somebody was born in England and is living in Scotland. You have said they are entitled to a Scottish Government pension, but if they keep their UK citizenship, does that mean they are also entitled to a UK pension and they get two pensions?

David Wood: I think that is unlikely.

Q4959Mr Reid: I agree, but how do you legislate to stop it? Legislation has to be passed saying which Government is responsible for paying that person’s pension, so, if you were advising the Scottish or the UK Government, how in practice are all these things going to be sorted out before 24 March 2016?

David Davison: I think it is unlikely they will be.

Q4960Mr Reid: If they are not sorted out, who pays the pensions on 25 March?

David Davison: Practically, there would have to be almost a transition period whereby there is an acceptance of who pays the pension at outset, whether you are paying it based on residency or citizenship, for example. Effectively, you will then have to negotiate what the cost of providing that is, with almost a catch-up balance once you have agreed what the final cost might be, and who you are providing those benefits for.

Q4961Mr Reid: Are you suggesting that immediately after independence the UK Government would continue to be responsible for paying all pensions to everybody who was a UK citizen as of 24 March, even though they then decide to take out Scottish citizenship?

David Davison: No. I am suggesting the idea that there is identification of which individuals fit in which camp, depending on the detail, and then each Government will take responsibility for paying those pensions.

Q4962Mr Reid: But that identification would have to happen before 24 March 2016.

David Davison: Yes.

Q4963Mr Reid: That goes back to my first question. Does that mean that every UK pensioner has to be written to before 24 March and asked which Government they wish to pay their pensions?

David Wood: I would be surprised if pensioners were given the choice. I would have thought there would be an intergovernmental decision on how that would be split.

Christine Scott: There might be some scope. I do not think it is just between the two Governments, because individuals themselves might have a view.

Mr Reid: There seems to be some disagreement between David and Christine.

Christine Scott: I think there is a communication piece there. How that is conducted I do not know, but this is an issue beyond just the two Governments, and it involves individuals and their particular circumstances. There is a big responsibility on both Governments maybe to set some criteria as to where the room for manoeuvre is for certain individuals.

Q4964Chair: Are you saying people might have a choice, in which case I would choose to have my pension paid by whoever is paying more? Does that not seem a reasonable way of doing it? If there is discretion and people have the right to choose, most sensible people would choose to get their pension paid by whoever is offering more.

Christine Scott: I am looking at this from the historic position, the legacy and what has been built up prior to independence. What happens after independence is a different issue, and that will depend on where you work and how you are building up credits and national insurance contributions towards a pension. It is what happens to people who are in receipt of pension now, having paid into a UK system, and people who are not retired yet and have paid into that UK system, and trying to establish what happens to that legacy.

Q4965Mr Reid: Yes, but, as the Chairman said, given the choice, people will choose the better offer or, if they have to make the choice in advance, they will make an estimate of which offer they think would be best in the long run.

Christine Scott: At the moment, the Scottish Government are proposing to adopt the single tier pension that the UK Government are proposing, with the possibility of a slight uplift if the UK pension is less than a certain amount. I think it is £160.

Q4966Mr Reid: Say everybody living in Scotland and everybody living in England, Wales or Northern Ireland who has some form of connection with Scotland believes that offer, could they all choose to be Scottish pensioners?

Christine Scott: I think we need a set of criteria that shows where the choice might be; for example, if you have worked part of your career south of the border but live in Scotland, you might be able to claim a close connection with England and you might wish to have your legacy sit with the UK Government. I think it will depend on individual circumstances and what framework is agreed between the two Governments.

Q4967Mr Reid: But you are the experts. If you were being asked by the UK and Scottish Governments to devise a system for sorting out all of this, what would be your advice?

Martin Potter: There is nothing out there that I have seen to suggest that people would be given a choice, as we have just been talking about. The only choice that we are clear people will be given is on 18 September when they go to the ballot box.

Q4968Mr Reid: We are getting conflicting answers from different members of the panel.

Martin Potter: The Scottish Government pension paper does not talk about the choice. It is quite clear that, if you are in Scotland on independence, it will take responsibility for your pension, and if you accrue one after independence they will also take responsibility for that. It is a statement of intent.

Q4969Mr Reid: It is a statement of intent, but what does that mean in practice? Say I was a resident of Scotland but had spent a large proportion of my working life in England. Could I say, "I prefer the UK Government’s offer"?

David Davison: To a certain extent one of the things you are trying to do is pretty consistent with what we have been talking about, for example, on currency or EU membership. The problem is that you do not know. One of the things we raised in the paper was the uncertainty about how the system will actually apply. You will have a lead-in time between the vote and the date of independence when the objective will be to try to sort out all these issues from the point of view of the two Governments.

Q4970Mr Reid: That is right, but what I am asking you as a panel, or as individuals, is to propose a solution to this problem that is practical. Martin is the only one who has come up with a suggestion, but I then posed a further problem. Perhaps Martin could respond to that.

Martin Potter: If I was advising Government, I would say you want a system where people cannot game it.

Chair: I am conscious that Graeme and Lindsay have got planes booked. I suspect they could not get on the plane you are on, because the later ones are all busy.

Lindsay Roy: You have booked all the seats.

Q4971Graeme Morrice: Could I ask about the implications for the national insurance fund, which is similar to the question about the state pension? If Scotland became independent, is there a risk that Scotland could lose out as a result and, if so, how?

David Wood: I think that goes back to your original question. Does the national insurance fund still exist? Is it a fund of cash to pay pensions? To what extent will the Scottish Government be able to negotiate some of that notional money as part of its opening balance sheet to pay future pensions to people in Scotland, who may have accrued an entitlement to pension over their working lives in the UK?

Q4972Graeme Morrice: Do you have a view on how it may go? It is obviously down to the negotiations and the outcome at the end of the day, and you cannot prejudge that, but do you have a feel for how it may go?

David Wood: The sensible starting point seems to be splitting the liability on population share. That is a very blunt way of starting.

Q4973Graeme Morrice: But do you think Scotland could lose out as a result? Is that a possibility?

David Wood: It could; in the negotiations Scotland could gain and it could lose.

Q4974Chair: Surely it all depends on the negotiations, doesn’t it?

David Wood: It does. We accept in our paper that there are still a lot of fundamental uncertainties and that, even though some of the questions have been answered, many of them cannot be.

Q4975Chair: Is it fair to say that this whole area is a pig in a poke, or will people have a greater degree of clarity by the time we get to the vote?

David Davison: If you go back to the first paper-probably the actuarial paper is exactly the same-we raised a number of questions, some of which have been dealt with and quite a few have not. That was the rationale for the second paper, and the actuarial paper does the same sort of thing. The hope is that, by the time we get to the vote, a lot more of those questions are going to be answered, so it is an evolving process. There is still a lot of information missing. It is a bit like the previous session. There is a lot of uncertainty about the demographic numbers. You were looking for specifics around the demographic numbers. There is a lot of uncertainty around that, and more detailed work needs to be done to narrow it down to a point where people can understand the financial impact if it goes this way and the financial impact if it goes that way. There is a huge amount of uncertainty about those figures and getting any degree of clarity about what it actually means.

Q4976Graeme Morrice: Absolutely. To go back to the question of pensions, you will be aware that the Scottish Government have said they would like negotiations on transitional arrangements for pensions to start immediately. Is this feasible? Do you think that all the information required to do it is available?

David Wood: Is this in relation to the private sector cross-border issue?

Q4977Graeme Morrice: This is in relation to state pensions, which I kicked off with, and the transitional arrangements with regard to them, but it would also apply to public sector and private pensions where there is a cross-border issue with people having worked in England and so on. Take state pensions first.

Christine Scott: It will depend largely on what agreement is made. At the moment there is a system which pays pensions, and the question is how far a separate Scottish system could be established at the point of independence, or whether there is some scope for using the existing system as transitional matters are sorted out. There is no clear information from the Scottish Government on what the intention is.

Q4978Graeme Morrice: In terms of commencing negotiations on transitional arrangements, is it feasible to do that immediately, and is all the information there to do that?

David Wood: My understanding is that the only area where immediate discussions are intended is in relation to the EU cross-border issue. My understanding is that other negotiations would not take place until after the referendum, if indeed there was a yes vote.

Q4979Graeme Morrice: I am not sure whether that was no or yes.

Martin Potter: I will try, Mr Morrice. I would certainly support those negotiations starting immediately after a yes vote, if that happens. I have worked in pensions for 20 years, and know that there is enough complexity for it to take a lot of time. That would need to happen and it would be very important; a lot of people would be worried about it.

Q4980Graeme Morrice: But could it?

Martin Potter: I think it could. A lot of the details and theory we have been talking about, and some of the questions from Mr Reid, would need to be set out. We have only high-level intent at the moment; the rest would need to be thrashed out and it would take some time. That would happen. I believe a lot of data are already held by the ONS and various other organisations that would fill reams of papers written by both sides that of course are not suitable for the public, but that those involved in the negotiations would have to get into absolutely.

Q4981Mr Reid: Martin pointed out that the Scottish Government’s paper says that they will take on responsibility for paying pensions to everybody living in Scotland at the time of independence. It is almost certain that some of those people will want to retain their UK citizenship, and may prefer, as they are retaining UK citizenship, that their pensions should also come from the UK Government. Would they be refused a Scottish Government pension if they retained their UK citizenship?

Martin Potter: I cannot answer that question on behalf of a future Scottish Government and what they would negotiate, but bear in mind that in this country we already pay pensions to people who have citizenship of other countries but have worked their life in the UK, so the same could happen in an independent Scotland.

Q4982Mr Reid: You are right. Somebody could retain their UK citizenship and still be entitled to a Scottish pension, but the point I am making is, would they also be entitled to a UK pension?

Martin Potter: I do not see a necessary link between citizenship and your build-up of state pension. Again, if I were advising Government, they should avoid people gaming the system and doubling up benefits and windfalls. It would not be sensible if that was allowed to happen.

Q4983Mr Reid: How would you write the rules to avoid that happening?

Martin Potter: Gosh! You would have to get a lot of lawyers and legal drafters into a room to do that.

Chair: That is a transitional expense identified right away.

Q4984Mr Reid: Is that a don’t know?

Martin Potter: To write that would be a large project, and you would also have to think about people who had worked x years under an independent Government, went to the UK for a number of years and then went overseas. All sorts of different permutations would need to be codified.

Q4985Mr Reid: Say a foreign national had worked in the UK for 30 years and therefore, under the present rules, had built up a full pension. They have worked for some of the time in Scotland and some of the time in England. Who becomes responsible for paying their pension?

Martin Potter: As is proposed in the Scottish Government’s paper, if they are in Scotland on that day, the Scottish Government picks up the tab; if they are not, it will be the UK. The belief is that it will average out.

Q4986Mr Reid: Take somebody who worked in Scotland for a full 30 years and built up their full entitlement to a UK pension, working, say, for NHS Scotland. They go back to their home country and are entitled to a UK pension. Are you suggesting that the UK Government would be responsible for paying that person’s pension, even though all of their working life was in Scotland?

Martin Potter: I was thinking while you were talking. The problem is that, if there was a large-scale trend of people working all their life in England and then retiring in Scotland, or vice versa, you could have inequality, but if we believe the traffic is both ways, on average, the based-on-residency method proposed in the Scottish Government’s paper will be about right.

David Davison: The paper produced by the experts who were here before us suggested that the transition both ways is broadly neutral. That is one of the findings in their research.

Q4987Mr Reid: But that does not take into account people trying to game the system.

David Davison: I agree. You have to protect against it. It is a bit like warranties. Pre-independence, the benefit is effectively based on service as you build up years, so you would have to work it on broadly the same basis. Effectively, you would be building up service; you would have built up a period of service and someone takes responsibility for that service at a particular point in time. It would be the rub of the grain; if somebody worked for 30 years in one area, moved and then did only a year in another area they would not be the responsibility of that new area, because the expectation would be that it would balance out over the whole period; otherwise, you are getting into a situation where you are trying to do almost individual calculations for 65 million people, which is not going to be practical. You have to make a broad high-level assumption about how the finances might work. That is one of the areas where there needs to be more research, but broadly the preliminary research that the professors carried out suggested that there was not a huge trend of movement across the border one way or the other, either from a working perspective or people working their whole life in one jurisdiction and retiring in another, so it was broadly neutral and was quite a small proportion overall as well.

Q4988Mr Reid: Are you suggesting that where the person lives at a particular date, say independence day, determines which Government takes on responsibility?

David Davison: That is certainly the proposal as it sits at the moment. What we were pointing out in the paper was about whether there was any further negotiation about whether each Government would find a different objective in terms of it being based on citizenship rather than residency, but at the moment the proposal in the Scottish Government’s paper is that it is based purely on residency.

Q4989Mr Reid: What do we do about all the UK pensioners who are living abroad? Who takes on responsibility for them?

David Wood: It would have to be negotiated between the two Governments on a sensible basis.

David Davison: There might be a way of trying to make a broad assessment of the numbers of those that have accrued benefits in each jurisdiction, but again that is going to be subject to the negotiations.

Q4990Mr Reid: There will be a lot of complicated negotiations.

David Davison: Yes. On the national insurance fund, in reality, if you are in a funded pension scheme there is a pot of money that you can split, but, in terms of this, effectively there is not a pot of money. All you are doing is splitting the liabilities in terms of who is responsible for paying the future liabilities. The pension liabilities are likely to be offset against other liabilities, or you might have a gain on pensions in comparison, so it is all going to be a negotiation as part of a total opening balance sheet settlement.

Q4991Chair: Pension liabilities is a zero sum game, is it not?

David Davison: Yes.

Q4992Chair: It is not necessarily going to result in an amicable exchange of views, particularly if there are rows going on in other contexts and it is a real head to head.

David Davison: Absolutely.

Q4993Chair: In a head-to-head negotiation in these circumstances, which are zero sum, which side has the advantage? Is it the big one, the wee one or the one that needs to have a determination by a certain date? I am not entirely clear what factors might influence the balance of power in these negotiations. Can you help us?

David Wood: All those factors would come into play.

Q4994Chair: Yes, I know that, but I am wondering how they might evolve. So many things are up in the air. It comes back to the question of a pig in a poke. If it is zero sum, presumably the way in which it is resolved might very well impact upon the burden of public expenditure in an independent Scotland after the due date. Therefore, it has implications. People need to know what sort of things they might be letting themselves in for. You cannot help us with any of that. Is that fair?

Martin Potter: You ask about the balance of power in those negotiations. That seems to me a very political environment rather than one filled with actuarial factors that can be evaluated.

Q4995Chair: We recognise there are a number of decisions to be made and lots of big sums to be worked out. What I was not clear about was whether you were able to say that working out the big sums would resolve 95% of this, and the area for discretion and dispute would be only a relatively small one, or whether you would say that it would be the other way about and the decisions made would determine the overwhelming majority of the spending and the sums just follow on from that.

Martin Potter: I would expect a capital value to be placed on the value of benefits people in the rest of the UK had built up in state pensions, and a capital value could be placed on the amount of pensions people living in Scotland at that date had built up. Those two capital values can be thrown into the negotiation with all the other factors you mention and negotiations will take their course.

Q4996Chair: But these are enormously complicated calculations, and that almost does require the examination of every individual, does it not?

Martin Potter: You could try to break down people’s service-whether they have spent three years here and five years there; I do not know if the data exist to do that-and at a point in time, based on residency in the UK and Scotland, you could calculate that capital value and use the data held by national insurance at DWP. The Government Actuary’s Department could help you do those sums, and you would throw them into the mix with all the other things out there being negotiated.

Q4997Mr Reid: We heard in the earlier session that being Scottish means that, all other factors being equal, you live less long than somebody in the rest of the UK. When it comes to working out these liabilities, would you be advising that the liability for a Scottish pensioner should be less than for a pensioner elsewhere in the UK because they were less likely to live so long?

Martin Potter: You sound a bit like one of my trustees: "We’re a Scottish pension scheme. Can we have lower liabilities, please?" I imagine that the assumptions behind calculating those actuarial values of state pensions north and south of the border would be up for discussion. Both Governments would want to take advice, and life expectancy might be one of the contentious ones.

Chair: Mike, you wanted to raise a point earlier on, or has it now been covered?

Q4998Mike Crockart: Not completely. I go back to your point, David, about different ways of calculating pension liabilities; there were nodding heads all over the room at that point. It really cast doubt on the ability to conclude negotiations in quite a short period of time. Is there any experience? We certainly do not have experience of countries splitting up and doing this, but we probably have experience of large companies splitting up pension liabilities. What experience do you have? Lots of constituents come to me 20 years down the track to say, "My company was taken over by this company, or split from this company, and I have never recovered." How long does it take, and how do we make sure we do not end up in that position with these types of negotiations?

David Davison: It is very complex and it can take a long time. A lot will depend on the will of the participants and how quickly they can manage to get it through. I give you the example of the termination of a scheme: a company becomes insolvent and the scheme has to go into the Government protection fund. You would be talking about two years to negotiate that just in terms of the final assumptions and details. That could range from schemes that are relatively small to very large ones. It is not a simple task. It goes back to the point David made, and Martin alluded to it as well. You have 60 million-odd records at the national insurance office-at NICO-and you are trying to assess the value of those. This is one of a huge number of factors. It is just going to be one part of the opening balance sheet in relation to pensions, health and a huge myriad of other things. I suspect a lot of it depends on whether the Governments are prepared to take a reasonably broad-brush approach to how they do it, or whether they want to get into the absolute minutiae of a valuation of the level of each individual member’s benefit to try to make sure they are not losing out. It is going to be down to the will of both jurisdictions to achieve a result within a specific time.

Q4999Mike Crockart: You would accept that in the grand scheme of things, with negotiations on a number of fronts, it is unlikely that any one would be agreed until others had come to a similar end point. What type of figures are we talking about for pension liabilities? We are talking about pension liabilities for the next 30 years, which are large sums of money, so this would be a major decision that would have knockon effects on what both Governments would be prepared to accept in lots of other areas.

David Davison: Yes; billions of pounds.

Q5000Mike Crockart: Until this one is sorted, it is difficult to see how there would be agreement across myriad other areas where the sums would probably also be large.

David Davison: I imagine that, potentially, this would be one of the scenarios where there is agreement on nothing until there is agreement on everything.

Q5001Chair: In terms of cost, this is far bigger than Trident, is it not? This dwarfs Trident.

David Davison: It is billions of pounds.

Q5002Chair: The Scottish Government have said they would like negotiations on transitional arrangements to start immediately. Is the information available for those sorts of negotiations to begin, or would the first step still have to be the collection of lots of information?

Martin Potter: In terms of population statistics, the ONS has quite a lot. There probably has not been a history of breaking that out in their reports by the rest of the UK and Scotland, but I imagine that much of it already exists, and work could start pretty quickly.

Q5003Chair: Is it reasonable that some of the negotiations about establishing the basic position could begin as of now almost?

Martin Potter: I would think so.

David Davison: I think it is a matter of assessing the likes of membership records from national insurance and so on, and identifying what material is available. There is absolutely nothing to stop that commencing now, because you could then work out what the retirement position was likely to be as at the date of separation, if that actually happens. There should be advance planning going on to try to achieve that.

Q5004Chair: This is going to be either an enormous job creation project or huge amounts paid in overtime. Presumably, all of you are well above the level at which you get overtime pay, but for those who have to do these sums is that correct, or is this something that is fairly straightforward?

David Wood: Going back to what David said earlier, if a fairly broad-brush approach is agreed, it may be something can be done relatively easily; but if you go down to the detail, you are talking a huge amount of resources.

Q5005Chair: Surely, even with a broad brush we are still talking about very, very big sums of money, aren’t we?

David Wood: We are.

Q5006Chair: Therefore, that would tend to militate against there being just a broad-brush approach. Some of the other things that are being disputed would be lost in the loose change of these issues about pensions. Therefore, it is much more likely to be quite an intense discussion and debate. Coming back to Alan’s point, realistically none of this will be anywhere near resolved by the proposed date of independence.

Martin Potter: Traditionally, the capital value of these benefits has never been put on a Government balance sheet. These are pay-as-you-go arrangements, so they tend to be viewed on the basis that, if you get in enough money from national insurance contributions to pay the benefits out the other way or, if there is a gap, that you can meet it from other sources, all is well and good, as long as you keep an eye on the projections for the differential in the future. That is the challenge of a pay-as-you-go system. The capital value sitting behind that is less of an issue, because you will never have a call on all of that at one time. You have, hopefully, a constant stream of national insurance contributions to pay for those benefits.

Q5007Chair: That leads me on to the next point about affordability, stream of income and so on. To what extent do the differing age profiles between Scotland and the rest of the UK raise issues about affordability of pensions in a separate Scotland? What is your view on the discussion we had in the last session?

Martin Potter: Affordability of state pensions can be looked at in a number of ways. Is a state pension affordable by looking at the amount that the individual receives? Is affordability based on how long that person is going to draw it, or on who is eligible for it in the first place? Aside from that, does it depend on whether you have the money to pay for it coming in from national insurance or taxation? There are a lot of factors going on there to pick apart that question, and difference in life expectancy, which I think you are hinting at, is just one of those factors.

Q5008Chair: That is the problem. What we are looking for is some help with solutions, and that is why I was raising the point about whether the differing age profile in Scotland has a substantial impact upon possible affordability.

Martin Potter: We heard earlier that there are fewer younger people and a growing pensioner population in Scotland. That growth in the pensioner population is disproportionately higher, and there is a higher pensioner dependency ratio projected to occur for Scotland come 2035, which is 20 years from now. That is the challenge that the previous session was talking about.

Q5009Chair: Do you have any observations on these challenges? Was there anything that you thought you could add to the points we have already heard?

David Davison: The Scottish Government paper used ONS statistics. If you extrapolate from those, the previous paper was trying to look at it in terms of tax revenue versus paying out pensions. If you exclude the life expectancy issue, the ONS statistics create quite a stark view. The pensioner dependency ratio in Scotland is going to worsen much more significantly than in the rest of the UK. In the rest of the UK it is still going to deteriorate, but it will deteriorate more rapidly in Scotland. For example, broadly we have a relationship where at the minute about 3.1 working individuals pay for each pensioner. By 2036, in the rest of the UK that will go to about 2.9, but it will go to about 2.6 in Scotland, which is very significant over the next 30 years.

You then have issues about how many additional workers you need, which is the discussion you had previously, to maintain the same dependency ratio as in the rest of the UK. You then have a wider discussion about how many additional workers you need UK-wide to maintain the 3.1 relationship, which is very significant. Broadly, over the next 20 years to about 2035 or 2036, which was the question I think you were asking earlier, you will probably need about an additional 800,000 workers in that period. It is not quite as simple as that, because, if you look at bringing in additional workers, you will get not just those workers but other dependants-children-and eventually the individuals who come in during that period will retire, possibly in Scotland as well. No specific calculations have been made about those demographic issues and how much they impact on the actual additional number of people you have to keep it going.

Q5010Chair: To be clear, the 800,000 figure you mentioned is over a 20-year period.

David Davison: Yes.

Q5011Chair: That would be to maintain the same ratio as the rest of the UK.

David Davison: Yes.

Q5012Chair: That is 20,000 a year.

David Davison: Yes. It is not all that dissimilar to what was being suggested earlier. If you were trying to maintain the same rate as currently, you would probably need about 1.1 million or 1.2 million over the period to do that.

Q5013Chair: If it was 1.1 million or 1.2 million, it would be 30,000 a year.

David Davison: Yes. You then multiply that across the UK to get to similar statistics to keep pace with the change in the number of people.

Q5014Chair: This Committee is not going to be debating the question of independence for the rest of the UK. We are looking at the Scottish position. To maintain the existing dependency ratio would require 30,000 a year, leaving aside the question of how many of those people then become themselves dependent, or bring dependants in with them, requiring additional workers and so on. The 30,000 figure is almost an irreducible minimum.

David Davison: It is just a mathematical calculation.

Q5015Chair: But it is also a minimum figure, because if you want to maintain the ratio, given that others are coming in, it would be a higher figure than that.

David Davison: Yes.

Q5016Chair: That is helpful. Presumably, that is before we start raising questions about a more generous state pension and deferring increases in the state pension age as well, so those things would require additional numbers coming in as migrants, if the books were to balance.

David Davison: There are a couple of things, as the professors said earlier. First, the baby boomer generation is going to peak before it falls. There need to be much more detailed calculations about the impact of that pensioner dependency ratio related to longevity. If there is an improvement in life expectancy in Scotland of x amount over that period, what sort of impact would that have on the finances? That is one of the things we call for in the paper, because there are no detailed calculations or assessments out there at the minute. There are broad rule-of-thumb calculations, but nothing detailed in terms of how much that would actually cost.

Q5017Chair: In terms of things that ordinary people in my constituency would understand, 30,000 migrants a year as a minimum would be necessary to keep the same dependency ratio, assuming that they do not tackle the Glasgow effect of people dying younger. If we are successful in tackling the discrepancy in life expectancy between Glasgow and the rest of the country, that requires even more migrants.

Martin Potter: The increasing pensioner dependency ratio we have described is a big feature for the rest of the UK as well. We have been talking about migration being the policy to solve that. I am not sure that is right. I do not believe I have ever heard that there is an explicit link between getting more migrants in and solving our state pension age problem. There are now quinquennial reviews taking place for state pension age for the whole of the UK. One is due to take place this Parliament. The lever being used in the UK to date has been to set future increases to state pension age, and that is the one that I believe the Scottish Government have said in their paper they would look at according to their own circumstances.

Q5018Chair: That is right, but the concept of having an agreed quinquennial review and possible increases in state pension age is not really the message people have been hearing when the Scottish Government have also been talking about postponing the rise in the pension age. Yes, that might be said, but it is not the impression being created. We will obviously say to people that this could be tackled by raising the state pension age, but people would also want to hear that if that was not being done, and we are working on the basis that if people in Glasgow continue to die at the same rate, there would have to be about 30,000 migrants a year. If you want to reduce that figure, it means raising the state pension age on a certain time scale and so on, and all of that can be worked in. Does that seem reasonable?

Martin Potter: The other lever for a future Scottish Government is to decide as a matter of policy that they want to spend more on state pensions because that is the way things are going, rather than to achieve it through migration. That is the other way to top up the difference on the pay-as-you-go system.

Q5019Chair: To be fair, there is only a limited number of times you can spend oil money and still have the books balancing. That is not what has been suggested so far. All the discussion has been about growing the population in order to meet the dependency ratio rather than cutting public expenditure elsewhere to fund pensions. You are nodding. Unfortunately, Hansard does not record nodding. Let me put on the record that you nodded slightly enthusiastically, but not over-enthusiastically. Is that fair?

Martin Potter: I would agree with you, Chair, and I would respond that continuous increases in migration do not seem as if they would work either. I think you have captured the problem.

Q5020Jim McGovern: To be clear on some of the points you have raised, the Scottish Government are saying in their White Paper that they could afford to pay a more generous state pension and also defer any increase in the retirement age. They are saying that is based on lower life expectancy in Scotland. I get the impression you are saying that the ratio between people paying national insurance and people drawing a pension is such that that would not be possible in Scotland.

David Davison: There are two factors: life expectancy and pensioner dependency. The pensioner dependency issue does not really start to manifest itself in terms of slippage between the rest of the UK and Scotland quite so significantly until about 20 years out. The change over the next 10 years is not as significant; they are still quite close. If you look at it over a shorter period and take into account life expectancy projections, as the professors said earlier, there is possibly a justification on a moral basis in saying that the individuals can get a higher pension in that short term.

The issue is probably affordability 10-plus years out-whenever the pensioner dependency differential widens more significantly. From the pensions paper, the Scottish Government are not proposing to do that; they are proposing to create a commission to investigate whether they can do that. What we have raised in the paper is that we agree with that as a process, because there are so many of these questions that remain unanswered and there has not been any detail about comparing the two bits of it.

Chair: To be fair, if you say in a quiet voice that you will set up a commission to investigate, and then you say in a loud voice that you are decreasing the pension age, it is pretty clear which one people hear, isn’t it? It comes back to the policy on cake-having it and eating it. A slightly misleading impression is being created, which is why we are trying to pursue this. That is a very interesting point which we had not picked up before: some of these things might be more possible, or less unlikely, in the short term, but in the longer term it gets caught up in the bigger movement.

Q5021Jim McGovern: To pursue the same point, the Scottish Government’s White Paper is not entirely misleading. As Alex Salmond would say, it is not giving an answer to every single question. For anything they cannot answer, they say they will set up a commission.

David Davison: The paper we have written has raised that. We asked a series of questions and identified which ones we thought had been answered, and we raised additional ones, of which that is one, in terms of how it is affordable. That is what we raised in our second paper. It is an additional question that still has not been properly addressed in looking at the finances to provide that.

Q5022Jim McGovern: Leaving aside the state pension, does the population structure of Scotland have any other specific implications for the demand for public spending on health, residential care and so on? I know I am speaking to a few actuaries. Somebody once said to me that the definition of an actuary was someone who found accountancy too exciting.

Martin Potter: You need to be careful about saying that in mixed company. You are asking a question on which I am not qualified to speak.

David Davison: Our paper was very much written around the pension aspect. It has not really touched on health, because that is not really our speciality.

Jim McGovern: I accept that.

Chair: If we do not ask, we do not get the answers. There might not be an answer, but if we do not ask, it is not an option.

Q5023Pamela Nash: I want to move on to public sector pensions. If independence happens, unfunded schemes will give negotiators the most sleepless nights. ICAS said they were not clear on how liabilities would be distributed. Can you give us any idea of how they might be distributed? What would your advice be?

David Wood: These are similar sorts of issues to what we were talking about in relation to state pension.

Christine Scott: We have identified the same type of issues. Both commitments are unfunded, and again it is how you want to go about assessing who is responsible for the past service of individuals who are members of those schemes.

David Davison: You have two types of pension schemes, funded and unfunded schemes. In most cases, the funded schemes are already split to a certain extent, because you have separate local government schemes in Scotland as opposed to the rest of the UK, so we are talking primarily about the issues around unfunded schemes. The issues on unfunded schemes are pretty much the same as they are for state schemes. The only potential difference is that affordability is related to the number of workers. If you take NHS Scotland, the relationship to affordability of the payments of pensions from NHS Scotland is the number of NHS workers rather than the population as a whole. If the costs of the pensions were greater, with a higher working population employed in NHS Scotland, for example, that would pay the bill, but there is an additional cost in having those people working within the public sector. It is a two-way street on that one as well.

Q5024Chair: Is it fair for us to take the view that funded pension schemes are not an issue here? There is some detail at the edges and all the rest of it, but there is not a major set of issues here. There are no unknown unknowns or known unknowns.

David Wood: There may be issues about splitting and going back to the records.

Q5025Chair: There are big sums to be done, but the principles are all doable. There is not the same scope for negotiation or disagreement as there is on some of the issues we touched on earlier. For the funded ones, it is all pretty straightforward. Is that fair?

David Davison: There is more certainty, absolutely.

Q5026Chair: When you say "more certainty," I want to be clear whether or not there are any major uncertainties. The fact that you cannot think of any tends to make me think there are not. We can park that and say to people, "If you are in a funded scheme, the question of separation or independence does not really seem to cause any difficulties." Is that a fair thing to say?

Martin Potter: Instead of talking about funded public sector schemes, you would be talking about local government schemes. They are already set up under separate legislation and identified as separate regions of Scotland, England or Wales, as the case may be. Separation is there already and becomes more transparent. I can think of things that might make that more complicated-currency and EU membership-but there will be other people busy debating those issues.

Chair: We will come to EU membership later on, but, in general terms, if you are clear that that is not an issue about which we ought to be expressing concern, we are quite happy to move on.

Q5027Mr Reid: I have a question on public sector pension schemes. At the moment, the teachers and the NHS pension schemes in Scotland are paid by the Treasury rather than by the Scottish Government. Would I be right to assume that, because of the extra spending in Scotland over many years on health and education because of the Barnett formula, when we come to split up the liabilities there will be a greater liability per head in Scotland for teachers and health service schemes than there would be for the rest of the UK?

David Davison: Only in the last few days Reform Scotland produced a paper that has statistics on that which would suggest you are right. The proportion is higher.

Q5028Mr Reid: What about UK-wide schemes-for example, the armed forces scheme or civil service schemes? How do you split them up in the event of independence?

Martin Potter: The issues are very similar to those for the state pension that we were discussing at the outset.

Q5029Mr Reid: It depends on wherever the soldier happens to be living on independence day.

Martin Potter: There is no existing demarcation as far as I am aware.

Q5030Mr Reid: We have figures that show the distribution of pensioners throughout the UK. Can we assume that retired soldiers and sailors live in Scotland in the same proportion as the population as a whole?

Martin Potter: All these schemes have individual member records. They will be paying pensions to these people, so they know their bank account details and where they live. That data would be available. I have not seen it so I could not answer your question, but you must know who you are paying your pensions to.

Q5031Chair: All of that is doable and we should not really be concerned about it.

Martin Potter: It is doable.

Chair: Spoken with true caution. I am never quite sure whether or not you are just being hyper-cautious in these things, or whether there is a bear pit.

Q5032Mr Reid: There is an extra cost to Scotland of teachers’ and NHS pensions after independence which, at present, under the present devolved settlement, is not being borne by the Scottish Government but by the UK Government, so that is an extra cost of independence.

Christine Scott: I think that part of the pension contributions that are being paid in by those employed, say, in the NHS would go to pay for NHS pensioners, but if there was a gap that is what is picked by the UK Government.

Q5033Mr Reid: Am I right in saying there is a gap-a very big gap?

Chair: If you express the view yes, you have to say something, because, otherwise, nodding doesn’t get noted.

Christine Scott: Yes.

Q5034Mr Reid: If we move on to private pensions, are there going to be any issues there that you can identify?

David Wood: There is the remaining one from our previous paper about the cross-border issue. Pan-UK schemes will become cross-border and, therefore, on the face of it will need to be fully funded. There have been leaks in the last couple of days suggesting that the European Commission is proposing to deal with that issue, but it will be over a longer time scale than would be of help to us in this discussion.

Q5035Mr Reid: You think that is not going to be resolved by March 2016.

David Wood: There will be a need to resolve it in a different way from simply relying on the European Commission to sort out the directive.

David Davison: I think it is unlikely.

Mr Reid: I think Mike has whispered that he wants to pursue that.

Mike Crockart: Yes; I would like to get a bit more detail.

Q5036Mr Reid: Do the demographic issues that we have discussed for state pension schemes have implications for private schemes as well?

Martin Potter: The funding of occupational pension schemes in this country already requires that the trustees and actuary fund that according to the circumstances of the scheme, taking into account the promises made to members, their earnings and their life expectancy. So, as best as possible, they should already reflect regional or salary differences that affect those assumptions, and those should not change with independence.

David Davison: The only other one we raised in the paper was about auto-enrolment. I think that even the UK Government had difficulty finding a supplier for auto-enrolment in the UK based on the population of the UK, because there is a cost-benefit gain there in terms of it being based just on numbers. You have a better chance the bigger the numbers you have. The proposal is that there is a Scottish version, potentially, of the sort of NEST issue, and that would be, potentially, for a population of 5 million-odd, as opposed to 60 million-odd. The question we were raising as part of the paper was how easy it will be to find a supplier, and a supplier at the same price, as the current solution that is being offered in the rest of the UK.

Q5037Mr Reid: What about other small countries with a population the size of Scotland’s? Do they have auto-enrolment schemes? Are there any other examples to base it on?

David Davison: Just Australia.

Mr Reid: Australia is a lot bigger than Scotland.

David Davison: It is a compulsory contribution. Where there are auto-enrolment contributions, people can opt out, so the difference with Australia would be that the provision of the service has a certain outcome, because you know that all the population has to pay, whereas the concern with the NEST/SEST-type environment is that you could have a population of 5 million, of which 2.5 million were eligible but only 500,000 actually join. If you take the same sort of proportions with a population of 50 million, you know that you will still get potentially 5 million to join, so it is a much lower risk for the provider of that service, who can potentially offer a lower price because of that.

Q5038Mr Reid: The Scottish Government suggested that they will establish a separate Scottish pensions regulator which will operate within a shared financial regulatory system, including a pension protection fund. What are your thoughts on that proposal?

David Wood: I think it is sensible to try to mirror what is happening in the UK on a transitional basis for sheer pragmatic reasons, but you can imagine that over time the regulatory approach as between Scotland and the rest of the UK might differ. That might bring different pressures on a shared pension protection fund, so there could be concerns going forward in the short to medium term, and certainly in the longer term, as policies diverge.

Q5039Mr Reid: That is what the Scottish Government have proposed, but obviously it requires the agreement of the UK Government. Would it be in the interests of the UK Government to negotiate such a scheme?

David Wood: It would certainly be in the interests of the Scottish Government.

Q5040Mr Reid: Yes, but it needs two to tango. Would the UK Government tango?

David Wood: This is basically a self-insurance scheme, and the bigger the pool the better. From the rest of the UK Government’s perspective, if you keep Scotland in shared pooling arrangements, you’ve got a pool that is probably 10% or 15% bigger than it would be just for the rest of the UK. There may be a slight benefit, but there is not as much benefit for the rest of the UK as there is for Scotland.

Q5041Chair: Presumably, that depends on whether or not people believe that the 10% or so that Scotland contributes towards the pool is more risky than the balance of the pool, doesn’t it?

Martin Potter: Yes.

Q5042Chair: You don’t know that, do you? Again, we work on the basis that the English, Welsh and Northern Irish people will take a decision that is in their best interests in these circumstances rather than simply on the basis of Scotland’s best interests. Is there any reason why they would want to shy off from working with Scotland on that, based on past history? I do not know whether or not more firms have traditionally gone bust in Scotland and we have drawn on the pool more and, therefore, they would want to get shot of us, or the converse in these circumstances.

Martin Potter: The pensions protection fund charges levies to all occupational pension schemes according to their level of underfunding, the investment risk they are running and, importantly, the insolvency risk that the sponsor of that pension scheme bears. As it is, there is a fairly granular levy being charged to each and every different scheme and the backing sponsor. I cannot say whether the backing sponsors in aggregate in Scotland are more risky than in Wales. You could look at that, but I do not think it would change the levy basis. It might be interesting to see whether, at a macro-economic level, independence caused something to happen so that all Scottish employers suddenly were more risky. You would have to ask an economist whether there could be an argument for that.

Q5043Chair: It would very much depend, particularly from the English interest, on whether or not they thought there was anything in it for them in a sense, and, if there was likely to be a disproportionate level of risk from Scottish firms coming in, the tendency would be to refuse it really, would it not? David, you did say that, yes, you could see why it was in Scotland’s interests. There is a whole number of areas, not just pensions, where we are talking about what is actually in England’s best interests, and we are trying to establish that. This seems to be one of these cases where it is not entirely clear that there would be anything in it for England in particular to have this joint sharing relationship or pooling arrangement here.

David Wood: I think that is a fair summary. The demographics of the schemes in Scotland may be similar to those in England. I think that in the last evidence session we highlighted the fact that in Scotland there are one or two very big schemes which might skew that demographic slightly, but we would need to do some research on how that compared with the demographic in England.

Q5044Chair: Is it reasonable for us to start looking at this through the prism of other risk issues, such as the currency, joining the EU and a possible break there, and that that would possibly make Scottish firms a greater risk and, therefore, it is less likely to be in the English, Welsh and Northern Irish interests to have them in the pool? Is that a reasonable way to look at this, or am I missing the point?

David Davison: I think the macro issues are the big ones for this. If everything was equal, there would probably be a benefit in having the organisations in just for the pooling effect. If, as you say, that 10% or 15% becomes high risk, there is less of an incentive to have them in or to have them in on the same basis. They might want to have them in, but they might want them to pay a higher premium for being in, which has an impact on the firms in terms of what they are paying in levy.

Q5045Chair: If we work on the basis for the moment that the English, Welsh and Northern Irish schemes did not agree, presumably it is feasible that a Scottish protection fund could be established, or is there a minimum size you need to have to make something like that a real goer?

Martin Potter: It is a good question, Chair. The smaller that scheme became, the higher the contingency margins you might want to have to whizz down shocks, because in a smaller scheme it bounces around; in a bigger scheme you tend to smooth out those shocks. I can’t answer it in numerical terms, but the concept you are explaining makes sense for a small scheme.

Q5046Chair: When you say "contingency margin," does that mean more money?

Martin Potter: Yes.

Q5047Chair: It is sort of banker-speak for more money, is it? It is more expensive, so you have to pay more to be in a smaller scheme.

Martin Potter: The pension protection fund currently runs a fund to withstand future claims. In theory, if you were a smaller fund, what you were keeping in reserve would be more likely to be not used in some years and then wiped out in others, whereas for a big fund you would expect the claims to be more stable.

David Davison: There are about 6,200 schemes in the most recent PPF index. You are probably looking at 500 to 600 in Scotland. That is the broad number, so that gives you an idea of the scale.

Q5048Chair: I was struck by the parallel here with the question of banks and banking. You have two extremely large banks in Scotland where any adverse impact could have quite a substantial effect on the Scottish economy. In terms of firms in the pension protection fund, is there a parallel there? Are there one or two big firms, or a small number of big firms, that would require the others to be paying in quite a substantial amount to mitigate the risk? If there are a large number of very small firms, my understanding would be that the risk of any one going would have less impact and the premiums might be lower.

David Davison: I certainly have not seen any analysis of that, and the PPF does not produce any analysis. I think it just produces an analysis of schemes, but it is not an analysis by region, so it is difficult to comment specifically on it because you would just be speculating.

Martin Potter: Certainly, the pensions regulator at present regulates more closely the schemes and employers that pose the biggest risk to more members-but also the pension protection fund. For example, if the BT pension scheme went belly-up, it would be a big problem for the pension protection fund. In Scotland, it would be the RBS scheme, if it was deemed a Scottish pension scheme. That is not something we have really talked about. There is no definition at present of what a Scottish pension scheme is, so would it be that its trust deed and rules are written under Scots law or English law, or is it based on the balance of where its membership is and who the sponsoring employers are? That definition does not exist and it would need to be clarified, both for regulating that scheme going forward and also to whom it pays its pension protection fund levy. Conceivably, you could have schemes being split and paying part of their levy to the UK PPF and part to a Scottish one.

Q5049Chair: I cannot remember whether or not these were all issues that you addressed in your second paper. If not, these are issues that it is appropriate for us to be raising directly, is it not, in order that people in private schemes in Scotland can have some clarification about how their pensions might be protected?

Martin Potter: Certainly. We did ask about that definition in our paper: what is a Scottish pension scheme?

Chair: I am sorry. I am not quite as au fait with the details of your paper as maybe I should be. Mike, do you want to pick up question 28?

Q5050Mike Crockart: This is the subject that we almost strayed into a while ago about cross-border schemes, which is an interesting one. In the event of separation and Scotland becoming an independent country, its pension schemes which currently operate across the UK as domestic schemes would thereby become cross-border schemes. You covered it a fair bit in your paper. Could you briefly outline what the main consequences of that would be?

David Wood: The EU directive essentially requires such cross-border schemes to be fully funded at all times. That is the biggest impact. That would require, essentially, any deficits to be immediately made good. That is clearly not feasible. Most deficits in pension schemes are being made good under a recovery plan over an average of 11 years, according to a recent PWC report. Funding that immediately will present a lot of problems.

The paper of the professors in the earlier session dismisses that as just a funding issue, suggesting that the companies could borrow the money, pay interest on it and pay it back over a 11-year period. In theory, that sounds very good, but I wonder whether it would work out like that in practice and whether the banks would be willing to lend that sort of money over that length of time to fund a pension deficit. I think there are issues there to think through.

Q5051Mike Crockart: When you say "that sort of money over that length of time," what proportion of Scottish pension schemes-we have covered the difficulty of defining what that is-are underfunded at the moment, and what sorts of sums are we talking about?

David Wood: I look for help on that, but perhaps I could highlight that it is not just Scottish schemes. It is a big issue for the rest of the UK as well as Scotland.

David Davison: To give you an idea, using the pension protection fund index, at the end of 2013 there were 6,150 schemes UK-wide. Of those, 3,701 were in deficit and 2,449 in surplus on a PPF basis. If you were looking at a technical provisions basis of fully funded or a buy-out basis, there would be a much greater number.

Q5052Mike Crockart: This would have an impact on the majority of pension schemes in the UK; they would have to come up with billions of pounds.

David Davison: Yes, they would.

Christine Scott: If they were deemed to be cross-border.

David Davison: We are talking about 6,000 schemes, of which Scotland has a proportion and of which only a proportion will be cross-border. You could well have a designated scheme in Scotland that is just for staff in Scotland and applies only in Scotland.

Q5053Mike Crockart: Another way round this would be to split your scheme in two and have a domestic one for the rest of the UK and a domestic one for Scotland.

David Davison: In theory, yes.

Martin Potter: When this legislation first came in, we had the experience that a number of UK employers had Republic of Ireland scheme members. The experience at the time was that the simplest approach then-we are talking about small numbers of members-was quickly to set up a small scheme in Ireland to put them in to avoid funding the whole scheme up to that higher level. That was the route that the vast majority of the schemes that found themselves in that position took.

Q5054Mike Crockart: That was the three-year transitional period to allow that to be sorted out.

Martin Potter: Yes. They did not sort it by raising the funding up to that level but by putting them in separate schemes that were not cross-border funded and could be funded at a more leisurely pace than they did prior to that; so employers took action to avoid becoming cross-border pension schemes. It is a little ironic that this EU legislation is designed to encourage cross-border schemes and has had the opposite effect.

David Davison: There are costs and potential risks involved in doing that. To go back to exactly the same argument, if you have a larger number of schemes, there is a spread of risk with the PPF. In exactly the same way with a scheme, if there is a larger number of members, there is a spread of risk. If you have a scheme with 1,000 members and you are setting up a scheme somewhere else that has only 50 members, that is more difficult in terms of funding because it is more subject to shocks, which might not be the case for a larger scheme.

Q5055Mike Crockart: You have a situation where EU regulation says that you need to fully fund the scheme. The reaction to that is to split the underfunded pensions, which are now deemed cross-border, into separate schemes, of which the Scottish one will, in all likelihood, be quite a small part of it, if we are talking of large companies, and that is going to be more risky for the Scottish arm of that pension fund.

David Davison: It is going to be more risky for the smaller scheme potentially, I think it is fair to say.

Martin Potter: I am not sure every employer would find itself in a situation of having just a handful of Scottish employees. The magnitude of this challenge would be much greater than the one with the Republic of Ireland scheme members. Many companies have branches and employees in Scotland and England, whether they are headquartered in Edinburgh or Basingstoke, as the case may be, so this issue is likely to affect many of the 6,000-plus schemes in the UK.

Q5056Mike Crockart: Is the EU likely to be okay with this? Given that you have just said the UK-Ireland solution was to split it without thinking about underfunding, it is going to be an issue of far greater magnitude in splitting cross-border schemes across the UK.

Martin Potter: The regulator in Europe is called EIOPA based in Frankfurt. I don’t know its view on this matter. This is a problem peculiar to the UK-I was about to say "fairly unique"-both in the number and the type of defined benefit pension schemes we have, which is the largest number in Europe compared with any other European country, and the situation we could face of Scotland becoming independent has not cropped up before. It will be a UK problem that we would do well to discuss in Frankfurt or Brussels, as the case may be. I don’t know how that would go.

David Davison: As David said, there has been a leak. There are changes to the legislation being proposed, but the concern is that they would not be in in time. What we don’t know at the minute is: first, whether there will be any changes; secondly, if there are, when they will come in; and, thirdly, if they do come in after the date of independence, what the impact is after date of independence. You have got almost three levels of uncertainty about the way this is going to apply. You could end up applying it as it sits at the moment, or applying some other forward basis for this at a point in the future as well.

Q5057Mike Crockart: The Scottish Government have recognised this difficulty and proposed negotiating another exemption from the European Union, saying that it is not really a separate pension system. It will still have the same regulatory system, if that manages to go through, so really it does not need to fall within this EU regulation. Is that a viable position?

David Davison: The experience of Ireland was that it negotiated an exemption but it was for a much shorter period. The answer to that is that I don’t think anybody knows. There are quite a few moving parts to that, so I don’t think we can say with any certainty that they could negotiate something different from what was actually established.

Q5058Mike Crockart: Ultimately, it was not an exemption but a three-year transitional period.

David Davison: Yes.

Q5059Mike Crockart: Whereas here the Scottish Government are saying that this is not actually a separate scheme or a separate area, because there is a similar regulatory scheme and, therefore, it should not fall within the EU regulations.

David Davison: As Martin said, they would be pioneering on this, so there is no certainty about what result they might get.

Martin Potter: On the basis of how big a problem it is for UK schemes, which would be the larger number compared with the Scottish schemes, given the number of schemes in total in the UK, the need to approach the relevant authorities in Europe would apply in the UK and Scotland. As to how sympathetic they are and how one goes about that, I don’t know how things work in the corridors of power in Brussels.

David Davison: There is a commonality of interest on that one. It is not just one that affects Scotland; it will affect the rest of the UK as well.

Q5060Mike Crockart: Given the uncertainties about what is happening in the EU and the defined time scales that we would need to get to the end of those negotiations, the most likely end result is that cross-border schemes would be split into two jurisdictions, because that is the easiest way round it, surely.

David Davison: It will be driven by employers and whether they can afford to pay on a different basis, or if they want the certainty of not having to do that in terms of spreading the payment period for the deficit-

Q5061Mike Crockart: It would depend on how fast it was.

David Davison: Unless the rules changed.

Q5062Chair: If they could not afford to pay over that shorter period, would that mean the closure of the scheme?

David Davison: No. That would probably drive them to split the scheme, because if they split the scheme they would probably be able to pay the liabilities off over a longer period of time. I think that would be much better.

Chair: I see.

David Davison: As Martin said, you have different organisations here. If one organisation had a large number of members in the UK and a smaller number in Scotland, for example, and had money, it might just be better for them to pay off the liabilities in Scotland and fully fund it in Scotland. That might be easier, whereas, if you had a mix more broadly and you could not afford to do that, it would be easier to split the scheme. So it is going to be driven probably much more by the individual organisations and what their objectives are.

Q5063Chair: If the scheme is split and liabilities arise, and the firm feels that it can’t meet them, then, presumably, the answer is closure of the scheme.
What do you do in circumstances where the firm has a liability and feels it cannot meet it? Then what happens?

David Davison: Say you have a deficit of £1 million on a funding plan over 10 years and you are paying that off over 10 years. The full funding requirement is that you would have to pay that £1 million effectively immediately. By splitting the scheme you would still be paying off £1 million, but, if the scheme was split so that 20% was in one part and 80% was in the other, you would still be paying the same amount of money broadly; you would just be splitting it across the two schemes. You would still be paying £1 million, but one organisation would be paying £200,000 of it and the other £800,000.

Q5064Chair: There is no problem and all of that is doable.

David Davison: It is doable, but, potentially, it would be more expensive if you are having to pay to split the scheme.

Q5065Chair: Sorry-why is it more expensive if you are doing a split scheme but paying the same amount?

David Davison: Effectively, you are paying to run two schemes as opposed to a single one.

Q5066Chair: It is just the administration of the two schemes; it is not the lump sum that you have to pay in.

David Davison: Not necessarily. There could be a cost, because each scheme would have to be funded individually based on the risk of each scheme being exposed. Similarly, the PPF levy could be different, so the costs won’t be exactly the same. The costs would be broadly similar. All you are doing is not enforcing a debt to be paid at a single point in time.

Q5067Chair: That was the point I wanted to clarify.

David Wood: There would also be some administration and advisory costs in splitting, and it would take time.

David Davison: And also in auditing. If they stayed as cross-border schemes, there would be a yearly rather than three-yearly audit.

Christine Scott: That is the actuarial valuation.

David Davison: Yes.

Mike Crockart: That would be better for you.

Chair: Lots of luck. No wonder you are looking so cheerful about all that.

Q5068Pamela Nash: In the evidence submitted to the Committee from ICAS, it says that the choice of currency will have a very significant impact across the pensions sector. I am not clear-and I don’t think the Committee is-exactly what impact the currency will have on pensions. Can you tell us a bit about what the impact would be, and what the differences would be between the four possible currency options-I use that loosely-available to an independent Scotland?

David Wood: In our paper we were trying to flag up the extent to which it was reasonable to expect our questions to be answered, and currency, EU membership and other matters are fundamental issues there in the background. As to the currency impact on pensions, we covered it a little bit in the earlier session. If you have a separate Scottish currency, the pension scheme ought to be matching its assets to the liabilities, or the currency of the assets to the currency of the liabilities, to cut down exchange risk.

Q5069Chair: Can I be clear what that means? Let’s take Standard Life at random. If they had liabilities in Scotland, they would have to match those in Scotland with things like Scottish bonds, and, if they had liabilities in the rest of the UK, they would have to match them up there with bonds and the like in the rest of the UK. Is that basically the situation summarised?

David Wood: It is pretty much what it would mean. To reduce the risks, you try to match your assets to the nature of your liabilities.

Q5070Chair: What does that mean in terms of jobs in Scotland and the like? What are the consequences? Is that just a paper exercise matching in different locations, or does it mean that people physically have to move?

David Wood: I am not sure that has an impact on jobs in Scotland. I don’t see why that would impact on jobs in Scotland, to be honest.

Q5071Chair: If your liabilities and assets have to be split in that way, do they physically have to move? Presumably, they will be regulated from another environment. Would they have to have people there in the new location in the rest of the UK who were interacting with the regulators?

David Davison: I think the Scottish Government have proposed in their paper the mirroring of all the regulatory effects currently in place in the UK.

Q5072Chair: But, to be fair, that is within a sterling zone, is it not?

David Davison: As to the pension regulator, that sort of regulation would apply regardless.

Q5073Pamela Nash: That is the information we are looking for. Is that possible regardless, or would that indeed be affected by the choice of another currency?

David Davison: I can’t see that there is a difference. There might be a difference, for example in the investment regulation, but for the broad, high-level pension regulation I can’t see that there would be much of a difference.

Martin Potter: There is a practical issue about how you get paid your pension. That might be in the new Scottish currency and you need a bank account, but, if all your expenses as a member of the public going into Tesco were in the new Scottish currency, your pension and outgoings would be aligned. That is the first thing. What does it feel like to people? How do those schemes match those payments with suitable investments so that they minimise the currency risk of having liabilities in the new Scottish currency with assets? That is a live issue that the Institute and Faculty of Actuaries has been actively thinking about. It is not something we have spent a lot of time on to date, but the options are: some currency union with sterling, formal or informal; likewise with the euro, formal or informal; or some new Scottish currency. There are five different options. They would all have their pros and cons, and some would involve more change and difficulty. I don’t think any of them would be impossible, but from day one, for example, you would not have a capital market in the new Scottish currency, and there is no issuance by the Scottish Government today. That would take time to build up. That is one of the sorts of issues that would need to be addressed to achieve that matching.

Q5074Pamela Nash: Of the options, I do not think anyone is advocating an informal usage of the euro at all.

Martin Potter: No; I just mentioned it for completeness.

Q5075Pamela Nash: The eurozone is entered into only upon membership.

Martin Potter: There is an example of informal adoption of the euro, I believe, by Montenegro.

Q5076Pamela Nash: Yes, and Monaco as well. If there is a significant difference between formally using the pound as part of a currency union or just using currency substitution-or sterlingisation, as it has been called in recent weeks-would that have any impact?

Martin Potter: As I understand how that would work, an independent Scotland would be using someone else’s currency. They would have an economy set according to the Scottish Government and Scottish circumstances, but a currency that was behaving according to the UK’s economy and the UK Government’s bidding. It is at times of mismatch between the two that things could go wrong in terms of different economies going in different directions. I have not explored that further, but again they are questions for an economist.

Q5077Pamela Nash: I do understand how it could impact on the economy, but would there be a specific impact on pensions across the board?

Martin Potter: If you are using sterling with a certain value but living in Scotland and Scottish inflation-Scottish RPI-goes in a completely different direction from what is then UK RPI, your currency is devalued, so those sorts of issues could affect the value of your pension. I guess the same would apply to other investments.

Q5078Pamela Nash: Can you think of any other impacts?

David Wood: I can’t think of any.

Q5079Chair: So for pensions and financial services-the areas in which you work-you think you could muddle through sterlingisation. Is that basically what you are saying?

David Wood: I can’t see the particular impact on pensions. For financial services more generally there might be issues, but we are looking just at pensions here at the moment.

Q5080Chair: For pensions, you just muddle through. There might be some difficulty about differential inflation rates and so on and so forth, but you don’t think there is any major difficulty.

David Davison: There might be some currency exchange costs, but other than that no.

Martin Potter: My answer, Chair, is that it would be difficult but not impossible.

Chair: Difficult but not impossible: there are very few things in life to which that would not apply.

Q5081Pamela Nash: But just because it would be difficult but not impossible, it would still leave a cost to the pension, wouldn’t it?

Martin Potter: And risk.

Q5082Chair: Is that enhanced risk? What are the enhanced risks?

Martin Potter: The enhanced risks are what we have just described-that is, using a currency that bears no relation to the cost of living or the value of what you own.

Q5083Mike Crockart: You talked about pension funds balancing liabilities and assets, and generally making sure they are in the same jurisdiction. In a sterlingisation scenario you would be using sterling, and therefore you would be backing that by UK bonds.

Martin Potter: There is a perfect matching currency. A zero-risk asset for a pension scheme is generally considered to be the UK gilt. It is absolutely not the case that every pension scheme is 100% invested in gilts. They invest for return overseas and in nongovernmental debts, and I would expect that to remain the case in an independent Scotland.

Q5084Mike Crockart: But the non-risk part you would be looking at would be the gilts.

Martin Potter: In theory, yes.

Q5085Mike Crockart: Issued by the Government of the currency in which they are held. Those would be RUK gilts that pension funds would be interested in buying to match up their assets and liabilities.

Martin Potter: I lost you there slightly.

Mike Crockart: I am struggling with this as well.

Martin Potter: I think that for an entirely Scottish scheme, if we can define that-the risk-free matching asset-in an entirely independent Scottish economy with its own currency, it would be Scottish Government debt.

Q5086Mike Crockart: Yes, but in a sterlingised economy using sterling but not within a currency union, it would then be RUK gilts. Is it yes or no?

Martin Potter: It would depend. If the Scottish Government were issuing debt, you would have to look at what price they were trading at relative to rest of UK debt. That would tell you whether they were genuinely risk free, because both would be expressed in sterling. The markets might have a view that the Scottish sterling-denominated debt is more or less risky.

Q5087Mike Crockart: Forgive me, but you are saying it depends really.

Martin Potter: It depends on the credit rating of an independent Scotland.

Q5088Chair: All the evidence we have had is that people would tend to see Scottish gilts, bonds and so on in those circumstances as being more risky and therefore require a higher premium. So what would be the consequences of that for pensions? Would there be any consequences, or would that be avoided?

David Wood: I think that is covered in the paper by the previous people who were here fairly comprehensively.

Chair: They have gone, so we just thought we would ask you.

Q5089Mike Crockart: Presumably, you as pension administrators would go for the least-risk option, and, if it was RUK gilts, that is what would be bought.

David Davison: Not necessarily. It is driven by the individual scheme’s objectives. For example, if you have a very young scheme with a very young average age and a very long duration to the point where you are paying benefits, primarily you will invest it in growth assets, not gilts, whereas if you have a very mature scheme you will maybe invest more in non-growth assets effectively. The other drivers are the strength of the employer backing the scheme, because, even if you have a very mature scheme and a very strong employer, the employer will invest very much in growth assets to reduce the cost of buying the benefits, so it depends on the individual scheme.

Q5090Mike Crockart: There is something in the back of my head that I have not shared with you. The point I am trying to get to here is that, yes, lots of decisions are made about the types of assets you invest in, but once you have got to the point where you want gilts, then you go for the least risky gilts, which, in the scenarios we have been talking about with economists, are likely to be, certainly at the start-up point for a Scottish Government, RUK gilts, because they have a long track record. If that is the case, what impact does it have on the ability of the Scottish Government to raise money to finance their debt? They will have to finance debt from day one because they are running a deficit. If Scottish Government gilts are looked on as being more risky, where do they raise their debt?

David Wood: If I can just throw out a question while other people think of an answer to your question, would we look for the lowest risk assets or the assets whose risks match the liability of the risk? If the latter, you might well have the balance of some Scottish gilts and rest of the UK gilts because your liabilities are in relation to the Scottish economy. I would not necessarily conclude that it was all UK gilts that you would be looking to buy. I don’t know whether anybody else has any comments on that. I might be wrong, but I just leave that with you as a question.

Mike Crockart: Perhaps you can take that one away. I’ll give you some homework.

Q5091Pamela Nash: In your paper you also mention EU membership and I am sure you expected that might come up. What implications would there be for Scottish pensions if Scotland couldn’t join the EU on independence, or even if there was a gap between membership as part of the UK and its own membership?

David Wood: My initial reaction is that the cross-border provisions would not kick into play, but they might kick into play in a different way. We have not really researched or thought that one through. That is a very difficult scenario, and there are lots of other issues, such as VAT and the whole legal framework, than just pensions.

Q5092Chair: I understand that. Two whole issues have come out. One is the question of the ruling out of the common currency area, and the second is not being able to join the EU right away. Quite a lot of people have prepared papers and given consideration before these two issues became quite as prominent as they are now. That is why we wanted to see whether or not, in the light of these two issues, you have any reflections or thoughts that you did not have at the time because they were not prominent.

Martin Potter: Many UK pension schemes pay pensions to people based overseas, and that is not a problem. That would be the situation. If you had a rump of Scottish pensioners, you would carry on paying their pensions. They may continue to receive it in sterling, and if the new currency in Scotland did something else that would be an issue. They may incur extra transaction costs to get it out of their bank.

The difficulty would be with active members if Scotland was no longer an EU country. It is quite difficult for people in a non-EU country to remain an active member in a UK scheme. UK tax regulations prevent that, because it is difficult for HMRC to check that people deserve the tax approval that comes with being in a UK pension scheme. It would have to be settled by taxation treaty. In terms of the security of their benefits, if it is a UK scheme, it is still backed by the sponsoring employer. That bit would not be different, so it becomes the practicality of whether the UK’s legislation would allow it, and the tax treaty could exist to make that happen.

Q5093Pamela Nash: Is there other European legislation which impacts any private or public pension?

Martin Potter: There is an awful lot of legislation on pensions that is driven by the EU, for example, on sex equality, against discrimination and all sorts. That is there already for the UK. Would an independent Scotland setting up pension schemes be able to disregard some of that and create schemes that did not have those protections in them? I don’t know.

Q5094Chair: Even if they did, presumably, if they subsequently wanted to join, they would have to reinstate them, so realistically they are unlikely to do all that much drastically different.

Martin Potter: I would agree; that seems a sensible conclusion to reach.

Q5095Chair: Okay; that has covered the points we wanted to make. As we always ask at the end, are there any thoughts unexpressed, or any answers you had prepared to questions that we have not asked? No?

Martin Potter: No. I think you have pretty well covered everything.

Chair: You are too kind. On that happy note, can I thank you very much for coming along?