To be published as HC 140-i

House of COMMONS



Scottish Affairs Committee


Tuesday 14 May 2013

Ronald Bowie, professor David Bell, David Wood and Christine Scott

Evidence heard in Public Questions 2910 - 3059



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Oral Evidence

Taken before the Scottish Affairs Committee

on Tuesday 14 May 2013

Members present:

Mr Ian Davidson (Chair)

Jim McGovern

Graeme Morrice

Pamela Nash

Sir James Paice

Mr Alan Reid

Lindsay Roy


Examination of Witnesses

Witnesses: Ronald Bowie, Senior Partner, Hymans Robertson, pensions consultancy, Professor David Bell, Professor of Economics, Stirling University, David Wood, Institute of Chartered Accountants of Scotland, Technical Policy and Services, and Christine Scott, ICAS Assistant Director, Charities and Pensions, gave evidence.

Q2910 Chair: Welcome to this meeting of the Scottish Affairs Select Committee. As I hope you know, we are conducting a series of hearings into various issues relating to separation. Today we want to discuss with you the possible impact of separation on pensions. Rather than producing a definitive report ourselves, we are moving towards trying to identify those issues that we believe have to be clarified before people in Scotland vote in the referendum. The initial report that we are likely to produce, rather than providing definitive responses, will identify those sorts of issues and call on both the UK Government and the Scottish Government to clarify them. It will be a bit more than a preliminary canter around the course, but since both the UK Government and the Scottish Government intend to produce reports on this in due course, we intend to return to it after both Governments have produced responses, to see how the issues they have responded to cover the points that people such as you want to raise. I hope that is clear enough.

Can I ask you to identify yourselves for the record? I will start with Ms Scott, who, unfortunately, is sitting directly behind the man who takes the notes.

Christine Scott: I am Christine Scott, assistant director, charities and pensions, with ICAS.

David Wood: I am David Wood, executive director, technical policy and services, with ICAS.

Professor Bell: I am David Bell, professor of economics at the university of Stirling.

Ronald Bowie: I am Ronald Bowie, senior partner at Hymans Robertson, an actuarial consultancy, and a past president of the Institute and Faculty of Actuaries.

Q2911 Graeme Morrice: Good afternoon. My first question is for Professor Bell. Who would take responsibility for state pension entitlements built up prior to separation in the event of Scotland becoming independent?

Professor Bell: There is clearly an issue about entitlement. State pensions are pay-as-you-go systems, so they are met out of general taxation; they are not met from a fund that has been set up. There would be issues to be raised around the question of entitlement built up in England of someone who retires to Scotland, or vice versa. Presumably, exactly how that would work would have to be negotiated. Even more complicated would be someone who has worked for, say, half their working life in Scotland and half their working life in England and has retired in Spain. How that would be worked out would be a complex issue. Whereas the actual funding would come from the taxation in the two countries, the working out of the entitlements would be a more complex issue and would have to be agreed by the two Governments in some way or other.

Q2912 Chair: Can you clarify at the very beginning what you mean when you say something is complex? I can understand that there are lots of very, very big sums involved in this that are complex and difficult. Is it just a question of the sums being difficult and complex, or are there certain principles that have to be resolved and clarified? Is that the question of complexity?

Professor Bell: There are a certain number of issues of principle that have to be addressed. The magnitude of the overall sums is very important, but people want to know on an individual basis exactly who will be paying their pension. It seems to me that there has to be clarity about the rules by which allocation occurs between Scotland and England, depending on how the entitlement has been accrued.

Q2913 Chair: Is there precedent for that anywhere else? Is there a book of rules that someone can just pick up and say, "Here are the rules; work it out"-and the sums are then very big?

Professor Bell: People who have retired to Spain from the UK have accrued their rights in the UK and are paid by the British taxpayer. That is a very simple exemplar. It seems to me that whether a similar kind of arrangement could occur depends on the negotiations between the two Governments.

Ronald Bowie: I am not aware of any precedents for state pension schemes, but there are precedents in private sector pensions where companies have mergers or acquisitions and have to do something. Typically, companies will try to come up with some design principles, which will include fairness and whether something is practical to implement. A simple way of dealing with the example that Professor Bell gave would be to say that it should be based on wherever you are living at the point at which you reach state pension age. That satisfies the simpleness principle, but it may or may not satisfy the fairness principle. If the person spent 40 years working in England and came to Scotland to retire, is that fair on the Scottish taxpayer? You can probably design a set of four or five principles and then test each of the potential ways forward to see whether we have found a place that is kind of in the middle of those principles and which of the principles we feel most strongly about. If you are going to make a list of questions for both Governments, it would be interesting to hear what both of them had to say about what those principles would be and which ones they would prioritise.

Professor Bell: To add to that point, it seems to me that principles are good things in general but are particularly important in relation to pensions, because people want to know well in advance, when they are making contributions, where their pension will come from.

Q2914 Mr Reid: I want to pick up on Professor Bell’s point about the mythical person who spends half of their working life in England, half in Scotland, and retires to Spain. Let us say that I am that mythical person and am in Spain. You said that the Scottish and English Governments would have to agree, but let us say that they do not agree and that they have different views. Living in Spain, do I have any rights under EU law to make demands or to go to the European Court, or am I at the mercy of these two Governments?

Pamela Nash: Not to run to the EU.

Professor Bell: I presume that has to be set out before all of this occurs. Of course, it is difficult for people who have already accrued rights prior to any arrangement that might happen between the two Governments, but I would have thought that, for people who are accruing rights, part of the post-independence agreement must be how you deal with exactly that kind of issue. I do think there is a problem for people who have now accrued rights and how things will develop for them.

Q2915 Chair: Surely those who already have accrued rights are simply prisoners of any agreement that is reached. They do not have the opportunity to affect that at all, do they?

Professor Bell: Whether they can appeal to some European judicial-

Q2916 Chair: Leaving that aside, they are essentially decision takers. If the two Governments come to an agreement, they are stuck with it, whereas those who have not yet accrued rights can look at the situation and make decisions.

Professor Bell: Yes, I think so.

Q2917 Jim McGovern: Talking about principles, I am reminded of something that Groucho Marx once said: "Those are my principles. If you don’t like them, I have others." David, you mentioned Spain. Am I correct in saying that if someone retires and goes to live in Spain, the annual increases to the state pension do not apply to them, as they do not apply to people living outwith the UK?

Professor Bell: They certainly do not apply in Australia; that is my understanding. I thought that, under EU law, people living within the EU boundaries did get the inflation rights, which will now be based on the consumer prices index rather than the retail prices index.

Q2918 Jim McGovern: Ronnie was nodding his head there. Do you have definitive answers?

Ronald Bowie: It is my understanding that, if you are within the EU, you are treated as if you were in your home country.

Q2919 Jim McGovern: So you would receive annual increases.

Ronald Bowie: Yes.

Q2920 Jim McGovern: So if Scotland were separate, there would be no impact on annual increases-if Scotland were still part of the EU, that is.

Ronald Bowie: Yes.

Professor Bell: Depending on who is part of the EU.

Jim McGovern: I have got the principle.

Q2921 Chair: That is right. If we were in a situation where, for the sake of argument, pensions were agreed and Scotland was no longer part of the EU for a period, until it had negotiated its way in, once it came back in, people would get paid as if they were in the rest of the UK or wherever. However, during the period when it was out, they would be treated as if they were in Australia and the pension would be frozen. That is my understanding of the position.

Professor Bell: It would be interesting to see whether, after it acceded to the EU, the past missing-out of accrual was made good. I do not know why it would be, but it is arguable, I suppose.

Q2922 Graeme Morrice: What is clear is that this is getting more complex by the minute. Assuming that responsibility was shared between Scotland and the rest of the UK, what do you think would be the appropriate scale of Scotland’s share? The question is to David-or, indeed, anybody. It is your starter for 10.

Chair: I am afraid that the Hansard writer does not record that the witness rubbed his face, put his glasses on top of his head and shook it.

Professor Bell: On a pay-as-you-go basis, since we are thinking of the immediate post-independence position, obviously it would be something approaching Scotland’s share of total UK pensioners. At the moment, that is roughly the same as its overall population share. I guess that share will change in the future, but I think that would be a liability that the Scottish Government would have to pick up.

Q2923 Graeme Morrice: Okay. How do you think the system would work for Scots who had entitlement accumulated wholly or partly in the UK and for those in the future under a new Scottish system?

Professor Bell: Let me start with the demographic projections, which suggest that Scotland will age a little bit faster than the rest of the UK. That does not mean that it will age faster than all of the rest of Europe. Roughly in about 2030, there may be about 40 pensioners for every 100 people of working age in the rest of the UK and maybe 42 in Scotland. In Germany it will be about 50. Scotland will not be ageing as fast as Germany, but there will be a gap, which means that there will be more pensions to keep paying in Scotland. Clearly, one of the issues for the Scottish Government will be to fund the extra margin that results from the faster ageing of the Scottish population. So you start from a position where Scotland roughly pays for the existing cohort of pensioners and then you move to a slightly but not massively different situation.

That is the size of the group. The next thing is, what kind of pension do you offer them? We have moved to a situation where we have this triple-lock system of pensions. As far as I can tell, nobody is suggesting that the state pension post-independence in Scotland would be massively different from that. The current Office for Budget Responsibility projections suggest that, by linking the increase in state pensions to the consumer prices index rather than the retail prices index, and by gradually increasing the retirement age for women, in particular, over the next few years and for both genders during the next decade, the overall cost of state pensions will be around 6% of GDP and will not change hugely, to be honest. The particular problem that Scotland has is that, even if it agrees to go with that kind of design of state pension and goes along with the increases in the retirement age and the CPI adjustment, it will still have this additional problem of a slightly faster-ageing population.

Ronald Bowie: In addition-to go back to the point about principles-if the question is also how we transition from everybody being a participant in the UK state scheme to a situation in which some people are in the rest of the UK, some people are in Scotland and some people are in a combination of the two, in practical terms there are two main principles. One is to determine your pension according to where you end up at the point of retirement-either where you are living at the point at which independence arises, for those who are already in receipt of pension, or where they retire, if they have a mixed history. That is simple. The alternative is to do something in proportion to where you were. There may be refinements of either of those, but basically it is a binary thing. You go either for the very simple thing or for the proportionate thing.

I have no knowledge of how practical the proportionate thing is. How do you measure the proportion of a working life somebody has spent somewhere? I doubt there are records showing how long people have been somewhere. I suspect that, in practical terms, it may have to be the simple one, but a proportionate one would be fairer. In fact, as Professor Bell said, given that Scotland and the rest of the UK have broadly similar proportions of pensioners, it probably would not matter at the outset. As time went on, Scotland would have a bigger burden. Given that it does not make a huge amount of difference at the beginning, it may well be that the simpler approach is one that suits both parties.

Q2924 Chair: Can I be clear? Presumably part of the point of independence is to do things differently. If things were done differently, the question of whether it was an accruals principle or a "where you ended up" principle would make quite a substantial amount of difference both to the individual and to taxpayers. If, for the sake of argument, Scotland decided that it wanted to double the pension, presumably the English taxpayer would pay for that, if it were done on an accruals basis. Or would they pay out according to the level that they were paying to people in England-yes or no?

Ronald Bowie: As Professor Bell said, there is no indication that anybody is seeking to change the system that is emerging in the whole of the UK, either in an independent Scotland or otherwise, so the people who are already in receipt of state pension look like they can look forward to much the same. I suppose that, if you are a 40-year-old who has done 20 years of work in the UK and has another 27 years to accumulate, and Scotland becomes independent and chooses to accrue state pension in a slightly different way, those 27 years might qualify for a slightly different amount of pension. However, in practical terms, I think they would be required to give the first 20 years under the rules we have all got used to in the UK. You would get it from Scotland, if you were living in Scotland at the end, but it would be made up of two sections, were Scotland to choose to do something different in the future.

Q2925 Chair: Is that the view that your organisation would support?

Ronald Bowie: As we think about the questions we would like both Governments to answer, we walk through these examples and say that that seems to us to be about the only practical way of doing it. It would be easier if an independent Scotland mirrored exactly the rest of the UK. It may well expect to do that in the first few years, but after five years, who knows what circumstances would require?

Q2926 Chair: There is little point in separation to do things in exactly the same way. What if they wanted to do things differently after five years? In pension terms, five years is not a long time. I want to come back to this, because I am not quite sure; if you are walking through this, we are stumbling, so I want to be clear about it. If, for the sake of argument, Scotland decided to double the pension rate, would the Scottish fund have to pay that increase or would the expectation be that it would be drawn from the rest of the UK?

Christine Scott: I think it would be difficult to increase the amount retrospectively. A line might have to be drawn at the point of independence, with rights preserved at that point. That might be a way of doing it. In addition, you also have the proposals for the single-tier pension that will be ongoing and will be another factor in what the state pension looks like if Scotland becomes independent in the future.

Q2927 Chair: I can see how there are things that would be almost good practice-things that reasonable people could come together to sort out. What I am not clear about is whether, when you are discussing the question of the principles to be adopted, this will be a haggling process, with people having different small "p" political views on how this ought to be handled, or whether there are professional rules that, with good will, everyone can just apply and that are perfectly straightforward in principle. There are big sums involved, and it would be very difficult to do, but that is what you folk are paid for. That is distinct from there being wrangles on principle on which we need clarification before people vote.

Ronald Bowie: If I were advising either of the Governments, I would be exhorting them to have a clean break, so that neither party had any legacy liabilities from the actions of the other once whatever apportionment made at the point of independence had been done. That is not about being pro-independence or anti-independence. Both groups would be wise to have a severance so that, if one or other group decided to boost pensions five years after the event, the other party did not find itself with some unexpected cost-or an unexpected windfall, if pensions were to be cut.

Q2928 Sir James Paice: I want to pursue this specific point. As the Chairman has just said, we are assuming that these are reasonable people making reasonable decisions, but is it not the case that a new Scottish Government, in the case of independence, would have no obligations to respect entitlements, accruals or anything? Although there would be no haggling, to use the Chairman’s word, they could adopt a policy of "That is just our position". However unrealistic it is, the baseline could be that, in terms of their receipts-their pension income-a lot of people should not make the assumption that things will automatically go on as they are. It is entirely in the hands of whatever the Scottish Government decided after Scotland became independent. For example, they could say, "We are going to pay pensions only to people who live in Scotland." Am I not right that, because we are in completely unknown territory, this is all speculative, based on what we think reasonable people might agree to, and that actually the legal status is that they can make whatever decisions they want?

Professor Bell: The debate about pensions would be part of a much larger debate about the terms of separation. It would not be the case that the Scottish Government could unilaterally do what they wanted in relation to the accrued entitlements of pensioners, in the sense that at the same time it might be negotiating around issues such as the debt and the currency. It seems to me that, from an RUK Government perspective, it would make sense to take all of these things together and make sure that they were not committed to post-independence payments, for example, as a result of actions taken by the Scottish Government.

Q2929 Chair: I can agree with the general principle that nothing is agreed, as it were, until everything is agreed and that this, like everything, is overshadowed by Trident, the huge amounts of costs involved, the currency and so on. Notwithstanding that, there are some areas of work where things fall into place fairly easily. That is what we are really trying to clarify. From what you are saying, would it be right for me to assume that reasonable people pursuing reasonable arguments in this area should be able to tell people by the time of the referendum vote itself what a post-independence vote would actually look like in pension terms? Is that something too ambitious for us to look to?

David Wood: I see that as critically important. Everybody has a pension and feels entitled to retain the entitlement they have built up and to know that they will be able to continue to receive the pension that they expected to receive. Democratic accountability of the Governments comes in here-these entitlements cannot just be negotiated away. There are issues on both sides of the debate that the politicians have to negotiate.

Q2930 Chair: Is it reasonable for us to assume that the Scottish Government, in particular, should be able to say, by the time of the vote, "If we have independence-if Scotland separates-this will happen to pensions"?

David Wood: Our expectation should be that both parties set out their negotiating stance to give comfort to the electorate that the pension entitlements will be retained.

Q2931 Chair: I am sorry, but setting down the negotiating stance is not quite the same thing as saying, "This is what will happen." If you have a financial settlement that the Scottish Government do not like, unless they have actually committed themselves to something, they can say, "Well, it was the English what did it," whereas, if they make a commitment and there is a disagreement with the rest of the UK, they may have to find that money from somewhere else. The result is quite different in both of those cases. I am looking for clarification of whether, upon reflection, you think that simply spelling out the negotiating positions is enough or whether we should look for a firm commitment on these matters from those who are seeking change.

Ronald Bowie: I suggest that, if one were looking for the commitments, they would come under three broad headings. The first is the design. Would the Scottish Government follow the flat-rate pension of £144 a week? Would they follow the triple lock that is now in place? What would they do on means-testing and those other kinds of things? What would they do on the state pension age, on which the UK Government have set out their intentions? The second heading would be the implementation. Would it be where you are living at the point at which independence happens or would there be some sort of proportionate thing? For me, the answer to that question would tease out quite a lot of other things. The third thing would be an acknowledgment that the demographic disadvantage that Scotland appears to have over the next 20 years had been taken into account when making those commitments. If you got decent answers to those three things-whether you call that a negotiating position or a commitment-it would probably be about as much as one could expect a Scottish Government to do at this stage in the process.

Q2932 Chair: It is reasonable, then, for us to expect on behalf of people in Scotland that those who are seeking change would give a commitment along those lines, as distinct from simply saying, "This is our aspiration." Our anxiety about this process is that people will have to vote not on the basis of aspirations but, presumably, on the basis of commitment. People will want to know what the nature of the change is going to be before deciding.

Ronald Bowie: I do not want to step into politics, but I am not sure whether at this stage anybody can make a commitment on their negotiating stance. Setting out an intent to follow that line would be-

Q2933 Chair: On that basis, people would say, "We intend that everything would be better," and that would be their negotiating position. That does not provide much comfort for real people facing a choice. You can see what we are trying to clarify-what it is reasonable for us to expect those who are advocates of change to commit to and what is genuinely unknowable. From what you are saying, it seems to me that most of this is actually knowable. They might not get the money they want, which might require a commitment of cash from somewhere else, but it is entirely possible for them to give a clear commitment on the structures that you mentioned-the three tiers, the triple lock and all the rest of it-and on the amounts. Unfortunately, Hansard does not record nodding of heads.

Ronald Bowie: And that the whole thing has been properly costed, with all the other stuff. As you said, nothing is agreed until it is all agreed. You have to see the costs of this- which, as Professor Bell said, is one of the biggest costs that either Government face-in the context of all the other commitments. Perhaps that would be the fourth thing-to show that it has been properly costed alongside all the other things.

Q2934 Chair: Is it reasonable to expect that in the run-up to the referendum?

Ronald Bowie: I would say so.

Q2935 Chair: Again, a shrug and, "I would say so."

Ronald Bowie: Given that pensions consistently come in the top three of people’s concerns, I would have thought that it was absolutely essential for everybody, whether it be the UK Government or the potential Scottish Government, to make that clear.

Chair: Graeme, are you finished?

Graeme Morrice: I think that Mr Bowie answered the last question I had to ask in this section a while ago, so I am done.

Q2936 Pamela Nash: Am I right in saying that the work of the International Pension Centre would need to be replicated in an independent Scotland? A separate Scotland would need its own version of that.

Chair: Let it be recorded that there was a look around. I think you end up being it, Mr Bowie.

Ronald Bowie: The International Pension Centre is one of a whole raft of regulatory and governmental things that would either have to be replicated or for which there would have to be some kind of sharing mechanism. There are very few, if any, pieces of the pensions governance structure that currently exists in the UK that can be done away with, so either they would have to be recreated or there would need to be some sharing mechanism.

Q2937 Pamela Nash: In that case, I envisage that it would also need to liaise with the remainder of the UK’s Government, so it would be even more complex than the situation we have at the moment. I am just asking whether my vision is correct or whether I am going wildly in the wrong direction.

Ronald Bowie: A lot of these structures-whether it is the Pensions Regulator, the International Pension Centre or whatever else-are quite small even for the UK, so subdividing them to a tenth of their present size to accommodate Scotland does not seem to be terribly practical; this is a personal view. My personal preference would be to find some way of there being some sharing so that you did not try to recreate a very scarce resource in micro in Scotland.

Q2938 Pamela Nash: Are you saying that, if Scotland were a separate country, it should be sharing that resource with the remainder of the UK?

Ronald Bowie: Let us take the Pensions Regulator, about which I know a lot more. There are 300 people in the Pensions Regulator, covering the whole of the UK. That covers defined benefit and defined contribution schemes. Would it be practical to have a team of 30 in Scotland as a Scottish pensions regulator, given the range of things they have to cover? It may be better to have some sort of agreement in which the Pensions Regulator remains as it is, there is some kind of cross-border treaty and Scotland picks up a tenth of the cost of the Pensions Regulator.

Q2939 Pamela Nash: I would think that neither of those situations would be right and that you would have to replicate something closer to that size even in Scotland. It would not be dependent on our population or GDP-you would still need the same number to do that work for a country.

Ronald Bowie: There are some functions of the Pensions Regulator relating to policy where I agree that it is not very size-dependent. There are other things such as supervising individual pension schemes where the number in the UK is 10 times the number in Scotland and where it would be proportionate to numbers. It probably lies somewhere between 30 and 300.

Professor Bell: Would the sharing solution work only if there were an agreement that the regulations should be the same? In other words, if the regulations were different, that could not happen.

Q2940 Chair: Surely people will be bright enough to run two different sets of rules, will they not?

Professor Bell: Maybe.

Q2941 Chair: I am just thinking that through. You have supervision, policy and things like that, and then you have implementation. If it is just a question of the figures being different, presumably the supervisory and policy tasks are pretty much the same.

Professor Bell: It depends on whether you want to be radically different or just to change some rules at the margins.

Q2942 Chair: Just a wee bit different.

Professor Bell: If it is just a wee bit different, it does not matter so much, I think.

Q2943 Chair: One of the issues relating to the question of the International Pension Centre is people in Spain, for example. For those who went from Scotland after separation, it would be pretty straightforward, but would those who had gone before separation become an inherited responsibility of Scotland?

Professor Bell: That would be a difficult one to figure out.

Q2944 Chair: That is why we are asking you.

Professor Bell: You might adopt one of these proportionate rules, so you would go back into their national insurance records. I am not absolutely sure whether the national insurance record identifies exactly where they have been working, but you would have to do something like that or ask the people. This would have administrative costs, but it seems to me that, for example, you would have to look at the individual circumstances and apply some kind of principle by which to decide who bears which part of the cost of their pension.

Q2945 Chair: Again, is that something that it is reasonable to have clarified before the people come to vote? While those who are in South Africa or somewhere else may not, by definition, have a vote, they may have relatives here who may be concerned about their future. Is it reasonable to expect commitments from a Scottish Government on something like that?

Professor Bell: Clearly, it would be a concern for Scots living in Spain at the moment, so it would be good to have some kind of statement, at least, about how the Scottish Government saw that position going forward.

Q2946 Pamela Nash: Professor Bell, you talked earlier about the ageing population and how Scotland was ageing slightly more than the rest of the UK. Did you say that the figure was 42 per 100 for Scotland and 40 for the rest of the UK?

Professor Bell: Yes.

Q2947 Pamela Nash: Is that difference of two per 100 something we should be concerned about? You were talking about the effect on the state pension. Should we as a Committee be aware of any particular effect that it might have on public sector pensions or, indeed, private pensions?

Professor Bell: Increasing longevity is a problem-it is not a problem; it is a success-across both the developed world and quite a lot of the developing world. There are associated issues. The real one is how you encourage people to save enough during their working lifetime in order to pay for the pension post-retirement. The gap between Scotland and RUK is largely the result of higher levels of fertility in England, in particular, over the last few years-very recently, high levels of fertility among migrants into England. Scotland does not get the same flow of migrants that RUK gets, although it has had positive in-migration in the last few years. So you have this slightly greater imbalance between the working-age and the older population in Scotland. It will carry additional costs, but, as I said, the ageing of the Scottish population is not particularly dramatic by European standards. Germany, Italy and Spain will all have far more old people per 100 working-age people than Scotland will. One thing, of course, is that in Scotland life expectancy is low by European standards. It has been increasing, but not converging with England’s, for example; it has been going up in a parallel line. There are additional costs, but it is important not to believe that those will bring about the end of the world.

Q2948 Pamela Nash: The second part of my question was, will there be any additional effects on private pensions or public sector pensions?

Professor Bell: Many of the public sector pensions, aside from the local government scheme, are also pay as you go, so there will be an issue around additional taxes that would have to be raised in order to pay for public sector pensions. Public sector pension costs account for about 2% of GDP, so they are quite a bit smaller in total than the state pension in terms of the share of GDP. However, I think there are around a million people in Scotland who are members of schemes or dependants of members of schemes-people involved in working in the public sector and who are retirees from the public sector-so it affects almost a fifth of Scots.

Q2949 Pamela Nash: My last question is about the ICAS report that came out in April. Could you provide a brief summary for those who are not aware of it? In particular, could you reflect on the fact that concerns were raised about the quality of the DWP’s historical data? Could you tell us a bit more about those concerns? Do you think that this will affect the Department’s ability to separate that information if Scotland does indeed separate from the rest of the UK?

Christine Scott: Are you asking about our report generally or for a summary of a specific area?

Pamela Nash: I am asking about your concerns about the historical data.

Christine Scott: The Comptroller and Auditor General audits the Department for Work and Pensions’ resource account and gives a sort of regularity opinion, essentially on whether payments are being made to state pensioners in accordance with the framework that was set out. He has found that there are both overpayments and underpayments, which arise from errors in the underlying records. Although there has been improvement in those underlying records, the difficulties were significant enough to qualify that part of the audit report. That would certainly be an issue because, if there were an agreement about which pensioners would be paid by the rest of the UK and which would be paid by an independent Scotland, you would need to know which individuals’ pensions you were paying for. That would be one of the issues in developing a state pension system for an independent Scotland.

Q2950 Pamela Nash: Just to be clear, do you have a concern that that would affect the reliability and, in fact, the ability to separate that information and to allow those calculations to take place?

Christine Scott: It would be one factor. As you know, there are already issues within the system, and they would not be resolved purely by separating them out.

Q2951 Jim McGovern: Regarding public sector pensions, I think it is acknowledged that there are more people employed in the public sector in Scotland than in the rest of the UK. If Scotland were to separate, how would that be funded? At the moment, it is devolved, but whatever happens in the rest of the UK with public sector pensions generally happens in Scotland. If Scotland were to separate, it would not be devolved-it would be entirely separate. Would that mean an increase in taxes? Given the higher level of people employed in the public sector in Scotland, how would the pension scheme be funded?

Professor Bell: There are a number of different public sector pension schemes, which vary quite considerably in their contribution rates and so on.

Q2952 Jim McGovern: Yes-there are funded and unfunded schemes.

Professor Bell: It is not just the number of people employed in the public sector that matters. There are three things that I think matter a lot. There is the number, but there is also how long people have been working for the public sector, which determines how much they have accrued in terms of pension rights. There is also their average wage, because in most cases their pension will be related to the wage. Some will be on final salary schemes, so it is likely to be the highest wage they have earned. It is not just the number.

When you look at Scotland, you find that there are a slightly higher proportion of people in the public sector. They tend to work longer in the public sector in Scotland, but their average wage is lower. There are not so many highly paid public servants in Scotland as there are in the rest of the UK. Maybe these last two issues are offsetting each other, but it is important to realise that it is not just about the number. As a result, you will have a higher pension bill, which is where you started from. Again, it will be somewhat higher-not massively higher-on a percentage-of-GDP basis.

You have to decide how you are going to fund that. That is part of the overall fiscal deal that you have to handle. The question then is, do you do that by, for example, changing taxes? What do you do by way of changing the structure of pensions? There has been quite a lot of activity by the UK Government over the last few years around changing the structure of pensions. It would be an issue to deal with. However, as I said, it is not of quite the same magnitude as the state pension in terms of the proportion of your overall tax revenues you will have to devote towards public sector pensions.

Q2953 Jim McGovern: Ronnie, you are the actuary-the guy who makes the forecasts.

Ronald Bowie: Indeed, but please don’t shoot the messenger.

Jim McGovern: Is an actuary somebody who finds accountancy too exciting?

Ronald Bowie: Yes, sir.

Chair: The old jokes are the best, eh?

Ronald Bowie: Yes. The extrovert actuary is somebody who looks at other people’s shoes rather than his own.

Can we divide it into the unfunded schemes and the funded schemes? I will come back to the funded schemes in a minute. All public sector schemes are in a state of flux just now, partly because benefits have been reconsidered in the rest of the UK. They are under consideration in Scotland for those schemes where the Scottish Government have some say. Numbers are declining because the public sector is shrinking. What that means in the unfunded schemes is that the amount of contributions that are going into the schemes is in decline because the numbers are going down. People are taking early retirement or being made redundant, so the amount of pensions is taking a step up. We have a situation where there has been a step down in contributions and a step up in payments. Income and expenditure were broadly in balance, so we are in the course of a period when, in the UK and in Scotland, we are switching from public sector pensions being cash flow positive to their being cash flow negative. In both Scotland and the rest of the UK, the unfunded public sector pensions will become a bigger and bigger cost to the tax burden than they were.

For the reasons that Professor Bell gave, Scotland has more people in public service, so it is likely to get worse. There are some projections from Audit Scotland predating all of this flux that suggested that the net cost would be something like £500 million in three years’ time. It will almost certainly be a wider gap now. That will be a problem for either a UK Government or a Scottish Government. In an independent Scotland, it is obviously on a smaller tax base than before. We come back to the same question of whether, should the time come for separation, it is done on a proportionate basis or on where you finished work-exactly the same issues as for the state scheme. Again-to pre-empt the question the Chairman will doubtless ask-these are things that one would expect to have been put forward and explained in advance of any vote.

The good news on the funded schemes-the local government schemes-which are going through some of the same pressures, is that they have assets behind them. In general, the Scottish local government schemes are slightly better funded than their English and Welsh counterparts. If they woke up one day and were part of an independent Scotland, they would not find themselves any better off than they were the day before, but they would remain slightly better off than their English and Welsh counterparts. It is one of the success stories in Scotland.

Professor Bell: Can I add a very nerdy point? It is about what it means when the public sector schemes go cash flow negative-who pays for that? The employer’s contributions come from the departmental expenditure limits-DEL-whereas the shortfalls on public sector pensions come from annually managed expenditure, or AME, which means that the Treasury pays them directly. That means that if, at the moment, the public sector schemes go cash flow negative, the cost is not borne by, say, Scottish education and health spending; instead, the money comes direct from the Treasury.

Q2954 Chair: What are the consequences of that for separation?

Professor Bell: I guess there is the question of whether an independent Scotland runs its public expenditure system in the same kind of way the UK already does. The UK does it by having a spending review that sets the pattern of DEL for the next three years or thereabouts, so all the Departments have some certainty about the level of cuts or increases they will receive and the Treasury balances the difference. It is up to an independent Scottish Government to run things differently, but it seems to me to be important to give your health service, your education and your public services some certainty over the short to medium term, at least, about how much they have to spend.

Q2955 Chair: I know that Lindsay wants to come in, but can I clarify your distinction? I appreciate that having that sort of three-year rolling programme might be appropriate for the first elected separate Scottish Government but, at the point of separation and in terms of what people know they are voting for, that is not immediately necessary-or do you think it is necessary for the Scottish Government, as part of their papers, to spell out that that is what they intend? Coming back to the point that Mr Bowie made, I can see why you might want to have sets of accounts and so on showing how, at the time of transition, you would expect the allocation to be made to meet any deficit that was spelled out, but surely you would not need to commit yourself to a rolling programme of expenditure such as an expenditure review, because the results of the elections might bring forward different options from parties. That has to be the subject of politics after any separation.

Professor Bell: Sure. Without a doubt, different parties may have spending plans post-separation, but I guess they need to make sure that they have a costed basis around which they make those spending plans that includes how they might deal with any shortfall on public sector pensions.

Q2956 Chair: I think that is right, but for the purposes of this, is it reasonable for us to expect that those who are arguing for change will be able to produce as part of their prospectus for separation a costed assessment of how these sorts of deficits will be met in a financial architecture that will give people a degree of confidence that, moving forward, things will be solvent or managed, as it were, at least until the next Government come in and make a mess of it-that at the time of the break, at least, it will be balanced and clear?

Professor Bell: It seems to me that you can certainly make that case. Equally, we need to have clarity around how the UK Government are going to deal with it. It is a broad issue. There is an overall UK funding of pensions issue.

Q2957 Chair: The distinction is that the UK is undoubtedly ongoing. The question of separation is a big one. People can put forward a whole variety of mutually incompatible proposals and claim that they will all be met, but, if they are not costed and accounted for, the whole thing will not add up and people will be disappointed. I just want to clarify that, in your view, it is entirely reasonable for us to expect to see a set of anticipated books, so to speak, with all sorts of big sums in them for the immediate post-referendum period that people like you will understand and that you can then explain to us.

Professor Bell: I think you would like to know what the proposed solutions for the key issues are. Going back to the state pension, we have a set of proposals for the UK that are ongoing. We do not know whether or not they will work, but they appear to be consistent and costed.

Q2958 Lindsay Roy: Good afternoon. Much of the discussion has been very complex and intricate. Can you clarify whether it is the case that, in terms of the state pension and public unfunded pensions, Scotland benefits from the sharing and pooling of resources in relation to need and entitlement? That was just to make it more complex.

Professor Bell: I am sorry-what does Scotland benefit from?

Lindsay Roy: The sharing and pooling of resources in relation to need and entitlement with regard to pensions in the state and the publicly unfunded sectors.

Professor Bell: I guess you could go back to the "Government Expenditure and Revenue Scotland" report, which implies that Scotland, excluding oil, receives more by way of expenditure than it provides in revenue-that it raises less than it receives.

Q2959 Lindsay Roy: So the answer is yes.

Professor Bell: There is also a general point that risk pooling is a good idea.

Q2960 Chair: Leaving aside for a moment the question of income, what I took out of what Lindsay was saying was this. Barnett gives more money to Scotland per head than is received in England and Wales. Does the same apply for these moneys for pensions?

Professor Bell: That is a difficult thing to calculate. The state pension is one of the benefits that is claimed almost 100%; there is no shortfall in terms of claimants. That takes me back to my previous statement that at the moment Scotland has about the same share of pensioners as the UK as a whole. In that sense, Scotland is not benefiting particularly from the state pension per se. If you look across the whole range of welfare benefits, Scotland gets a little bit more, particularly on the disability side, than the RUK average, but it is much less above the average than, say, Wales or Northern Ireland.

Q2961 Chair: If we do not take all public spending of that sort, only public sector pensions-not the state pension-what would the balance be? Does Scotland get in, as it were, in the same sort of ratio as Barnett?

Professor Bell: That is a really difficult one to calculate. Quite a few of these pension schemes are UK-wide, so they do not produce such figures. The NHS pension is the NHS pension for the whole of the UK.

Q2962 Chair: You can see why this is obviously important.

Professor Bell: The teachers’ pension and local government are separate, but a number of them are UK-wide.

Q2963 Chair: So that is a don’t know-or is it an unknowable?

Professor Bell: You could make a guess at it, just on the basis of the number of public sector employees and the arguments I went through with Mr McGovern before. On average, public sector pensions may be a bit higher, but I cannot go to any published statistic and establish that that is a fact.

Chair: Right. It might be helpful for us to pick up that question to see whether it can be clarified. We have Danny Alexander in front of us tomorrow. I am sure his civil servants, who are watching this, will presently be beavering away, having had notice that we are going to ask about it.

Q2964 Lindsay Roy: For the state pension, is longevity risk-pooled across the UK and does that benefit Scotland?

Professor Bell: What happens is that the Government Actuary estimates the number of pensioners across the UK going forward as far as 2060. Arguably, in certain parts of Scotland people do very badly out of the state pension. If you take Glasgow, where men’s life expectancy is little more than the state pension age, they do very badly out of the contributions that they put in via their national insurance through time. Does Scotland benefit? What happens is that the Treasury makes an assessment of the likely cost of pensions going forward, taking into account the changes in its design, and comes up with an estimate of how much they will cost in terms of GDP. Taxation at UK level is then adjusted to take account of that. This does not really become a Scottish issue as it is taken forward by Government.

Q2965 Lindsay Roy: What is that assessment in relation to benefits to Scotland? Is it beneficial to Scotland?

Professor Bell: It is a useful device to have, going forward, to have some understanding of this.

Q2966 Lindsay Roy: Have you seen figures that indicate that that is the case? I am not sure whether or not you can confirm that. That is what I am trying to get at.

Professor Bell: Going forward, Scotland will have a higher proportion of older people and a lower proportion of taxpayers than the rest of the UK, so in the future it may be the case that there is a net benefit accruing to Scotland. However, when Scotland has about the same share, I am not clear that there is a massive benefit to Scotland per se from this.

Q2967 Lindsay Roy: But there is some.

Professor Bell: I tend to think in terms of welfare benefits. Welfare benefits are paid to people who deserve welfare benefits; at least, that is the principle under which they work. It is not that there is an allocation thereof to Scotland-that is just the way the welfare system and the old-age pension system work out. There is an issue around funding that Scotland might have to deal with post-independence, but there is in no sense a bias towards Scotland around the provision of old-age pensions and welfare benefits. It seems to me that that is not the case.

Q2968 Jim McGovern: On the subject of demographics, you mentioned Glasgow, in particular, where a large proportion of the population do not actually reach pensionable age or get just beyond it. How is that reflected across Scotland? On average, do people in Scotland have a greater lifespan than those in the rest of the UK?

Professor Bell: No.

Q2969 Jim McGovern: Lesser?

Professor Bell: Less, I think. For male life expectancy, I think the difference is about two years-something like that.

Q2970 Jim McGovern: Three years?

Ronald Bowie: Two years.

Professor Bell: That is two years less, on average, of receiving a state pension. There is a general issue of what will happen if life expectancy in certain parts of Scotland does not increase and the state pension age continues to increase, so that an even smaller proportion of people reach beyond that state retirement age.

Q2971 Chair: I have just had drawn to my attention in this book, which you may or may not have seen and which I will hold up for the cameras for a moment, the suggestion that spending per head on old-age pensions in Scotland is £1,413 and the comparable English figure is £1,329. That is drawn from Treasury 2012b, PESA tables 10.5 and 10.6, with which I am sure you are familiar, and would tend to suggest that there may be greater spending per head in Scotland. I am sorry, but I was not aware of that.

Lindsay Roy: That is very helpful, Chairman.

Professor Bell: Is that spending per pensioner or spending per person?

Chair: Spending per head, it says.

Professor Bell: Spending per head, yes.

Q2972 Chair: Now that I have read that out, it will be in the record, so you will be able to see it, to check the table and to tell us whether there is anything you disagree with. If only I had read and memorised this excellent book beforehand, I would not have needed to ask you that. Do David Wood and Christine have anything to add in this area? I do not want you two to get off easily here.

Christine Scott: Not really. I think David Bell has covered it rather well.

Chair: That is fine-you do not have to. I just did not want you to feel that you were being left out.

Q2973 Mr Reid: As I understand it, there are different types of schemes. There is the local government one, which is funded. Is it a reasonable assumption that, after separation, we would not really see any change in that?

Ronald Bowie: Unless a new Scottish Government were to change the face of local government in Scotland, there is no particular reason for those schemes to change. They are self-contained, have Scottish regulations and are invested globally. There are some second-order questions that we may address when we come on to private pensions. If Scotland were independent and were issuing its own national Government stocks, would there be pressure on Scottish local authority schemes to invest in those Scottish Government stocks rather than in UK Government stocks, which are-for right or wrong-perceived to be a safe place in which to invest at the moment? There would be issues about currency. If a Scottish local authority scheme were invested in shares in countries around the world or in English-quoted or rest of the UK-quoted shares, would it be running a bigger currency risk? However, in terms of general shape and viability, there is no reason why they could not survive and prosper in an independent Scotland.

Q2974 Mr Reid: We will look, then, at police and fire, which are unfunded but, I understand, entirely devolved at the moment. Is that correct? Would I be right in saying that we would not see much change there?

Ronald Bowie: That is correct. They are in the same boat as the Scottish NHS and the Scottish teachers’ scheme. There are no assets supporting those schemes. The benefits that are currently allocated and how much people have built up so far could all remain, but they are part of the increasing burden, whereby cash out is increasingly exceeding cash in. Although they are devolved, the financial dynamics are very similar to those of the Scottish NHS and the Scottish teachers’ scheme.

Q2975 Mr Reid: I left the complicated ones till last. Those are the NHS and teachers’ schemes, which are unfunded and executively devolved but funded by the Treasury. Can you explain how the system works at the moment? As I understand it, the Scottish Government have devolved powers to fix the employee and employer contribution rates, yet the Treasury guarantees funding. If the Scottish Government reduced the employee contribution, which they have the powers to do, who would make up the shortfall?

Ronald Bowie: I am sure Professor Bell can give chapter and verse on how the dynamic of it works. My understanding is that in the current and recent round of benefit changes to police, fire and various other public sector schemes, although they are devolved to the Scottish Government, the Treasury gave the Scottish Government a cost window within which they were required to operate and which was a condition of continued funding. It is devolved, but the room for manoeuvre on benefit design is actually quite small. In the end, it has to be a benefit design that can be supported by the Treasury funding; the funding really drives everything else. I would not say that the devolved benefit design powers are worthless, but they are perhaps not as influential as they might at first appear, because the purse strings are really-

Q2976 Mr Reid: If the Scottish Government were to use the devolved powers to cut teachers’ employee contributions, for example, who would make up that shortfall?

Ronald Bowie: At the moment, in practical terms they could not, because they would breach the cost envelope. I guess that in an independent Scotland they could make that choice and would have to find the money for it.

Q2977 Chair: My understanding of the position-you may correct me if I am wrong-is that there is a funding envelope that is given to fund x amount of people, y payments and such and such coming in. However, if the Scottish Government decide that they want either to increase payments or to decrease contributions and put in the money themselves, they are free to do so. The cost envelope, as I understand it, is that you take the rules and we pay the money. If you want to do something different, you have to pay for it yourself, which is a not unreasonable proposition. Otherwise, you would cut the contributions to zero, double or quadruple the pensions, and some other daftie would pay for them. It is a natural control, isn’t it? If you want to make changes to this scheme, you have to pay for them. Professor Bell, you are nodding. I take it that that is an agreement.

Professor Bell: I agree that that is the situation. The pension schemes in Scotland have effectively had to follow what has happened in the rest of the UK over the last little while, because the Scottish Government have decided not to put in that additional amount.

Q2978 Chair: That is the key point, isn’t it? The Scottish Government have decided not to put it in, and therefore they have to follow the UK rules. If they decided to put in the money, they could make up their own rules-cut the contributions, increase the payments and so on. Therefore, it is genuinely devolved, in the sense that you have the power and, if you make a decision, you have to pay the costs of it. It is not the case that you make a decision and then somebody else pays for it.

Professor Bell: That would come out of DEL-departmental expenditure limits-so there would be an opportunity cost.

Q2979 Chair: Absolutely. Politics is about making decisions. They have the flexibility and the freedom to make those choices but have decided not to do so. Is that the position?

Professor Bell: That is how I understand it.

Q2980 Mr Reid: Thanks, Chair, for clarifying that. Where I was leading was that, with teachers and health, the Treasury guarantees the payments. Obviously, in an independent Scotland it would be the Scottish Government that would have to make these payments. Have the figures been calculated to indicate whether this would be an increased or a decreased cost burden on the Scottish Government per head of population, compared with what is being paid for at the moment by the UK taxpayer?

Ronald Bowie: As Professor Bell said, at the moment part of it comes from DEL and part of it comes from AME, our new friends. I am not sure how that gets paid for through the block grant.

Professor Bell: It goes back to this point about how an independent Scotland would choose to organise its finances and what Treasury function it would have. Part of its expenditure function would focus on these things that are difficult to predict on an annual basis-mainly pension contributions and welfare payments. The way the Treasury organises itself, that kind of spending is in one bucket; then there is all the other stuff that Departments spend. Both of these come within the overall fiscal envelope, so the question is, how do the Scottish Government balance these two while still targeting some particular level of deficit or surplus, depending on what their overall fiscal objectives are?

Q2981 Chair: If we leave aside for a moment the question of the amount of money that might be available under separation, which people will dispute-that is another meeting-effectively there are no additional powers for controlling the contributions and payments for these pensions to be gained by separation that are not actually available under devolution. They have full powers, as it were, under devolution to increase that, to cut this and all of that. They have to pay for it from somewhere else, but there is no magic power that they presently do not have, is there?

Ronald Bowie: There is for the civil service pension scheme, which is not devolved.

Q2982 Mr Reid: Sticking to teachers and health, there are no extra powers, but there is a disadvantage, in that at the moment the risk-by risk, I mean retired teachers and retired health service workers living longer, which is obviously good for them but is a risk to the Treasury-is carried by the larger UK Government, rather than falling on the smaller Scottish Government. Is that correct?

Ronald Bowie: Yes. There is a greater pooling, if you hold to the argument that the UK economy is bigger and better balanced than a Scottish-only economy would be. It is not so much in terms of how volatile the costs of the public sector pensions are but in terms of how volatile the income stream that will actually pay for them is. It is in that respect that the bigger difference comes.

Q2983 Mr Reid: Moving on to the civil service scheme, it would have to be disentangled. People have worked for the UK civil service. How do you decide whether the liabilities for their pensions lie with a future UK Government or with a Scottish Government?

Ronald Bowie: I think you would take whatever you had decided for the state and photocopy it.

Chair: This is a "reasonable people behaving reasonably" sort of argument.

Q2984 Mr Reid: Are there any precedents anywhere else in the world for disentangling public sector pension schemes similar to the ones we have in the UK?

Ronald Bowie: Not to my knowledge. If we come on to private sector defined benefit schemes at any time this afternoon, those are the places where there are precedents. From personal experience, I can confirm that it is a nightmare.

Q2985 Chair: Mr Wood, you are not familiar with what happened when Czechoslovakia split up and with the way in which civil servants’ pensions were dealt with there.

David Wood: I am afraid not. We have commissioned some research to look at splits like that. I think we are focusing more on the tax arrangements, rather than on pensions.

Q2986 Chair: When might that be available?

David Wood: Within the next six months, I think.

Q2987 Chair: That would be helpful. Czechoslovakia is an obvious precedent that has been set. I do not know how the coming together of Germany was dealt with in terms of civil servants’ pensions or whether ICAS has a man or woman in a cupboard somewhere who knows all about these things. You are the sort of people we would turn to in these circumstances to seek clarification. That seems to me to be an obvious precedent. I am not aware of others that there might be.

David Wood: The German situation is interesting. That was a coming together, rather than a splitting up, so it is fairly different. I am not aware of the details, I am afraid.

Q2988 Sir James Paice: I will do as you just suggested, Mr Bowie, and move on to the private sector. Some of my colleagues will ask you to talk about the cross-border schemes and things like that in a minute, but can we first reflect back? We talked earlier about the role of the regulator-whether the regulator could continue to cover the UK and Scotland, whether the rules would be the same, or whether, as the Chairman said, somebody could implement two sets of rules. The ICAS report suggested that, effectively, the UK Pension Protection Fund would have to be duplicated in Scotland. Could you elaborate on why you feel it needs to be there? If it is conceivable to have one regulator, could it not be possible to have one UK protection fund?

David Wood: There are probably three options for Scotland moving forward. One is to have no form of guarantee whatsoever. The second is probably to have some sort of Government guarantee for pensions. The third is to have a sort of pension protection fund into which schemes pay levies. So there are three options. If you go down the last route, with the pension protection fund, you come to the question of whether you have a shared UK regulator, as we have at the moment-there are critical mass issues, as Ronald mentioned earlier-or whether you set up a separate Scottish protection fund.

Q2989 Sir James Paice: If you did set up a separate one, how would you go about disaggregating the assets and liabilities of the current one?

David Wood: I guess you would need to establish some principles, as we decided earlier. I think it would be challenging and down to negotiation. There are schemes based in Scotland, schemes based in England and schemes covering both. They will have paid in levies to the Pension Protection Fund over the years. It is a fairly entangled mess, but you would need to determine some principle that would be roughly fair on both sides.

Q2990 Sir James Paice: You have neatly led me into the next question, which was going to be, how would you decide whether a scheme was a UK scheme, a Scottish scheme or whatever, under which regulator and pension protection fund it would fall and so on? Is there any precedent or guidance? How on earth would you decide it?

Christine Scott: My understanding is that, according to the way the law works at the moment, where the main administration for the scheme was-

Q2991 Sir James Paice: For the scheme.

Christine Scott: Yes. That would determine its country of origin.

Q2992 Sir James Paice: So, if an English or Welsh company with loads of employers in England or Wales had a scheme administered by the Royal Bank of Scotland in Edinburgh, it would be a Scottish scheme.

Christine Scott: It might depend on how you determined what administration meant-what would be encompassed within that-because you would have a trustee body as well. I could not answer with that level of detail. The key issue seems to be where the administration is and where the employee or the pensioner is, rather than where the employer itself is located.

Ronald Bowie: This is one of the difficulties. I take the Royal Bank of Scotland as an example. It is about a £20 billion fund, so it is a huge fund. A proportion of the benefits are underwritten by the Pension Protection Fund as it stands today, but the levy for that is spread across all the pension funds in the UK. If the Royal Bank of Scotland, at £20 billion, were supported by a levy only on those pension schemes that were registered in Scotland, it would be so top heavy that it would not really be insurance at all, because it is probably as big as all the other Scottish pension schemes put together. How could you have an insurance system in which one of the entities that was being insured was half the size of the whole thing? It is hard to imagine how that could be made to work.

Q2993 Sir James Paice: Does that lead you towards the idea of trying to persuade the Scottish Government, in this eventuality, to keep a UK-based protection fund?

Ronald Bowie: Except that, to the extent that I am aware that the current Pension Protection Fund has thought about this, one of the principles it is inching towards is fairness and equity between Scotland and the rest of the UK. Even if you have one pension protection fund but it has two pockets-a rest of the UK pocket and a Scottish pocket-that are supposed to be self-contained, you have the same issue. Other than just having a true insurance thing in which the schemes in the rest of the UK take the risk on all of the big schemes, I do not actually have a practical solution for that.

Q2994 Chair: Presumably the practical solution in these circumstances is for the Royal Bank of Scotland to move its headquarters or move to London so that it becomes covered by the UK pension protection scheme. From its point of view, that is the obvious thing to do, isn’t it?

Ronald Bowie: I am not going to speak for the Royal Bank of Scotland.

Q2995 Chair: All right-take a hypothetical situation with one firm.

Ronald Bowie: I should be a bit careful and declare a conflict of interest. I am still a trustee of the Royal Bank of Scotland’s pension scheme, so I ought probably to say nothing. I will take another example about which I have no personal knowledge-Scottish Power, which is owned by Iberdrola, a Spanish company, and has people who have worked in both Scotland and England in its pension scheme. There will at some point be an interesting corporate decision for Iberdrola to make, presumably, depending on how the rules go, on whether it registers the Scottish Power pension scheme in England. It may be that the members of the Scottish Power pension scheme would be quite happy to have their scheme registered in England because it would then have the benefit of the UK-wide Pension Protection Fund, rather than a smaller Scottish one. I do not know-we speculate here.

Q2996 Chair: But that is not an unreasonable assumption. Anybody who had a choice would prefer to be in a bigger rather than smaller scheme, particularly if they were a hypothetical firm which was possibly 50% of the size of the Scottish scheme.

Ronald Bowie: Indeed.

Q2997 Chair: That would be highly desirable. The only people who might be left in a Scottish scheme were those who did not have a choice, in the sense that their activities were restricted to Scotland.

Ronald Bowie: If you are a very large risk and you are not sure that the pool you are being insured by is big enough to support you, the logical thing would be to find a bigger pool that could support you.

Q2998 Sir James Paice: Yes, we have talked about the regulator and now we have talked about the pension protection fund. Are there any other regulatory, statutory-type organisations we have missed out that would be affected in a similar way by independence or separation?

David Wood: I suppose there is the whole framework of regulation and the legal system. In the period between a yes vote in an independence referendum and Scotland becoming independent there is very limited opportunity to develop something new, so I guess that through sheer necessity and pragmatism you need to carry on with a regime similar to that in the rest of the UK and change over time, if you wanted to.

Q2999 Sir James Paice: Have you come across any legal barriers or anything similar that would prevent a Scottish Government choosing to remain with the rest of the UK, such as the protection fund or the regulator?

David Wood: There is the cross-border issue that you mentioned, if you want to move on to that now. That is the main one that springs to mind. Is there anything that springs to mind for you?

Christine Scott: My understanding is that in terms of financial services, which our paper does not cover, a separate financial services regulator would need to be established, but we are not aware of anything specific in the sphere of pensions.

Sir James Paice: I think that leads on to the cross-border issues, Chair.

Q3000 Jim McGovern: Is it fair to assume that you have not had any talks of this nature with anyone from the Scottish Parliament?

David Wood: We have not yet.

Q3001 Jim McGovern: When you say "yet", does that imply there are plans to meet?

David Wood: There has been debate in the media, but there are no plans to meet. We are open to meeting with them if they request it.

Q3002 Jim McGovern: When you said that, being pragmatic, you think things would continue as they are if there was a vote for separation-that is, in the absence of any other plans.

David Wood: I tend to think so. Once there is a yes vote for independence, there are negotiations to take place; there are arrangements to negotiate on a whole heap of areas, of which pensions is just one. I just think it would be impractical to try to make major policy changes in such a short space of time. Good policy needs consultation, and rushing it through in 18 months would not be practical. I do see it as being pragmatic to pick up pretty much the same systems as the UK currently runs and change over time according to the policy wishes of a Scottish Government.

Q3003 Jim McGovern: To put it in a nutshell, those who are promoting separation have not approached you to discuss this.

David Wood: Not yet, but we are open.

Q3004 Chair: Am I right in thinking that you are in the fortunate position of being a monopoly, in the sense that there is not another body that represents people like you? You are it. Therefore, if they wanted to consult, you would be the obvious people to consult. There is not a rival organisation with which they could be discussing exactly these issues, is there?

David Wood: There are obviously other professional bodies, like the Law Society of Scotland, or other accounting bodies whose members are present in Scotland-the ACCA and the ICAEW-but essentially we are the UK body headquartered in Scotland.

Q3005 Chair: Is it reasonable to expect them to have discussed this with you, or should they have gone to somebody else first?

David Wood: We have had discussions on other topics. We have not had discussions face to face on pensions, but we have had meetings on other topics, and members of the Scottish Government and the Better Together campaign have done events for ICAS members to discuss the issues and educate our members and the general public. So there has been engagement.

Q3006 Chair: Better Together have had meetings with you but the Scottish Government have not.

David Wood: No. Members have come to ICAS events to speak to members and have a debate, but we have not had private meetings with Better Together.

Q3007 Chair: Does that not seem a bit surprising to you?

David Wood: I think it will happen in due course. We are starting to put papers out in the areas of our expertise, as are both Government parties, and I think we will be engaging in due course.

Q3008 Chair: We are going to have a referendum in September 2014. Is "in due course" before then?

David Wood: Yes.

Q3009 Chair: You expect it, but you have not had any notice of it yet. There is no invitation and no letter in the post yet.

David Wood: Not specifically, no.

Q3010 Lindsay Roy: My questions are focused primarily on David and Christine, at least initially. Could you briefly explain the EU rules regarding cross-border pension schemes? What issues have you identified surrounding the funding of cross-border pension schemes if Scotland leaves the UK?

David Wood: If schemes are cross-border schemes so that members operate in two different jurisdictions and there is a deficit on those defined benefit pension schemes, that needs to be made good straight way. Essentially, they are not allowed to run with a deficit; they have to be fully funded. The issue we have flagged up here is that, if Scotland becomes independent, you are creating a new border across the UK, so all the schemes that are currently pan-UK all of a sudden will become cross-border schemes and, therefore, would become subject to the cross-border rules at EU level. Whereas schemes across the UK that have deficits would probably have some sort of recovery plan to pay in extra money, say, over a period of 10 years, if the border was created, all of a sudden they would have to make good that deficit straight away.

Q3011 Lindsay Roy: In your report, you said that "the potential impact on funding requirements for employers operating defined benefit or hybrid schemes across the UK is likely to be substantial, although we have not been able to ascertain the number of schemes which would be affected". Why is that? Why are you unable to ascertain how many schemes or people would be affected?

David Wood: We could probably give some ballpark figures. Roughly, there are about 6,300 defined benefit pension schemes in the UK, and of those about 5,000 are in deficit. I understand that the total deficit across the UK is about £230 billion. Let’s say three quarters of those are England and Scotland. You could say that potentially it is three quarters of the £230 billion.

Q3012 Lindsay Roy: Is that a guesstimate?

David Wood: It is a complete guesstimate, yes; I am just hypothesising here. You could say that a deficit of £170 billion needs to be plugged almost instantaneously on independence. That is an awful lot of money to be moved from the business sector into pension schemes. There is an obvious concern at this stage of the economic cycle that businesses just would not be able to afford that. There needs to be some advanced planning to try to ameliorate those effects by seeking some sort of exemption or transitional route.

Q3013 Lindsay Roy: How big a concern is that for you, from your perspective?

David Wood: It is a very big concern. It does need addressing and to be thought about in advance. I would hope there would be some carve-out or exemption that would allow a certain time to make good those deficits.

Q3014 Lindsay Roy: Is there work being done on this currently?

David Wood: I am not aware of that. Our paper was flagging that up as an issue. The general response through the media suggests that there has been very little work done on this so far.

Q3015 Lindsay Roy: You suggested in your paper three possible options to address the problem. Is it possible to say which one of these is the most palatable position?

David Wood: Again, it is down to negotiation. It depends on what can be negotiated with the European Union by way of exemption or carve-out from the rules.

Christine Scott: It would be preferable, assuming Scotland and the rest of the UK remained within the EU, if there could be a tripartite arrangement with the EU to allow those deficits to be paid down over a period of time, even if it is a shorter period than the recovery plans would currently permit.

Q3016 Lindsay Roy: If I remember rightly, many of the schemes are operating on a 10-year recovery period to become fully funded. What issues might arise if that period were to be curtailed-for example, to two or three years?

Christine Scott: That would have an impact on the cash flows of employers, who would need to make good the underfunding in a shorter time scale.

Q3017 Lindsay Roy: Would that be a substantial issue?

Christine Scott: I think it could be, yes.

David Wood: The extreme case is that this throws businesses into bankruptcy and insolvency. That is something we all want to avoid, which is why this issue needs to be addressed.

Q3018 Lindsay Roy: Have you been able to estimate the minimum grace period that would be needed before all UK-Scotland schemes could become fully funded?

Christine Scott: No; we would not be able to answer that.

Q3019 Lindsay Roy: So there is a vacuum there that needs to be filled.

Christine Scott: Yes.

Q3020 Chair: Are you aware of any conversation on this that has taken place between the EU and the Scottish Government? Would you know?

Christine Scott: We are not aware of any. We may not know if conversations had taken place, but we are certainly not aware of any.

David Wood: There seems to be some assurance taken from the fact that there are some schemes operating in southern Ireland-sorry, Eire-and Northern Ireland, but, of course, Ireland and the UK joined the EU long before this pensions directive came in. If there are schemes that cross the border, they have found a way of working with these regulations, potentially by having separate schemes or being fully funded at all times. So I do not think that is a useful parallel.

Q3021 Chair: They would have grandfather rights in a sense, wouldn’t they?

David Wood: That is right.

Q3022 Chair: What happens if somebody joins the EU in terms of cross-border financial liability? Is there a precedent there at all?

David Wood: When a new state joins the EU there is a negotiation about the complete acquis of regulations, directives and so on to be taken on board. Time is allowed for these requirements to come into place, so essentially there are transitional arrangements. Is that your understanding?

Christine Scott: As far as I am aware, yes.

Q3023 Chair: You do not know whether the Scottish Government have got legal advice on this.

David Wood: I am not aware of that, no.

Q3024 Chair: Potentially, this could bankrupt the firms involved.

David Wood: In the extreme scenario, yes.

Q3025 Chair: What happens if a firm decides that it has to shut its pension scheme? It would close it with a deficit and it would have to make it up. Presumably, it could stop the deficit growing by simply shutting it. Is that an attractive option in any way? Would separation make firms more likely to close existing final salary schemes?

David Wood: I would probably ask Ronald for his views on this as well, but I would think that closing a scheme with a deficit would tend to make matters worse rather than better.

Ronald Bowie: As I understand it, the rule is that, if a company whose jurisdiction is in one country pays contributions into another, for as long as there is a deficit-I am not sure it is about leaving it open or closing it-the fact they pay money in triggers this crossborder thing. I suspect that more legislative burdens, from whichever direction they come, will be a further encouragement to companies to close off whatever else is going on, but this is not just a matter for Scottish companies. Marks & Spencer, for example, have lots of people working in Scotland and the rest of the UK. If Scotland becomes independent and there is not any relief from this immediate requirement to go cross-border, it affects Marks & Spencer. It is not just the Scottish Government who would want to have conversations with Europe; potentially, the rest of the UK Government would have just as much incentive to find some way of modifying this, particularly given that at the same time the European Union is keen to raise the bar on what full funding means. The UK Government have been lobbying hard to have that taken away, because in the UK enormous figures, like £800 billion, are being bandied around just now. This issue would be made more acute by an independent Scotland, but on this occasion the issue would be just as big for the rest of the UK as it would be for Scotland.

Q3026 Chair: Taking Marks & Spencer as an example, is it possible for them to split their company or pension scheme so that it ceases to be a cross-border scheme and becomes two separate schemes?

Ronald Bowie: When the rule was first introduced, a number of clients of my firm had a UK scheme in which 20 people from Ireland participated. They found it much simpler and less risky simply to carve out 20 people, put them in a separate scheme, make it fully funded and not take any risks. It has been done in the UK before in relation to Ireland. It would be possible. We are talking of hundreds of millions, possibly billions, of costs to disaggregate schemes. It is 6,000 sub-divisions with all the nightmares we spoke about at the beginning of this session in relation to the state scheme, where you try to figure out which half an individual is in. What about the individual who did 20 years in one country and 20 in the other? Which half do they go into?

Q3027 Chair: If I remember correctly, you were saying earlier that this is complicated, and it no doubt makes a great deal of money for you and your firm, but it is all doable. Presumably, if you were just splitting the pension schemes into two, you would not have the obligation to fully fund them in either, would you?

Ronald Bowie: You would not, but there is the whole business of separating all the investments and the transaction and establishment costs of separate schemes. Much as it grieves me to turn away income for my firm, I am not sure it is advancing the cause of humankind greatly for all that money to be paid to people like me simply to do that. It can be done, but is it a good use of money that might otherwise be used to build factories, open shops and do whatever else, because that is where it would come from?

Chair: If you had been a lawyer you would never have said that.

Q3028 Graeme Morrice: Sticking with the report, since it came out, could I ask David and Christine whether there has been much interest shown in it by employers and pension providers in Scotland?

David Wood: There has been a lot of commentary in the media. We have had some contact but very little.

Christine Scott: We have had contact from the chief executive of one pension scheme.

Q3029 Graeme Morrice: You mentioned earlier that you had not had much engagement with the Scottish Government. Have you received any kind of response to the report from the Scottish Government?

Christine Scott: We did share an embargoed copy with the Scottish Government, so they were aware of it but only a matter of a day or two before it was published.

Q3030 Graeme Morrice: Did they respond to it at all?

Christine Scott: We have not had any official response.

Q3031 Graeme Morrice: Has there been any political comment that you are aware of in the media?

Christine Scott: In terms of both the pro-independence and the Better Together campaigns, the report seems to have been broadly welcomed as being fairly well balanced in raising the issues and fairly neutral. That is largely because we are raising issues for the UK and Scottish Governments. The cross-border issue is an example of that, where we are saying it needs a solution that involves all the parties.

Q3032 Graeme Morrice: On the cross-border pensions issue in general, is there anything we can learn from the example of how it was managed between the UK and the Republic of Ireland?

Christine Scott: Our understanding is that the arrangements between the UK and the Republic of Ireland were introduced when the directive itself was implemented, so it was to allow a transitional period. The lesson there would be that we would want the Scottish and UK Governments to work with the EU to try to carve out some sort of exemption or interpretation that would allow schemes to pay down their deficits over a longer period.

Q3033 Graeme Morrice: What if Scotland was not part of the EU?

Christine Scott: That makes it more difficult.

David Wood: That makes it even more difficult. We are moving into even more uncharted territory.

Christine Scott: It is probably in the interests of a particular country whose citizens are receiving a pension from another state for that state’s scheme to be fully funded, but without the EU there would be no particular overarching mechanism for doing that, so it would have to be done through negotiation.

Q3034 Chair: If there is a cross-border scheme and one of the countries is in the EU and one is not, does the directive still apply?

Christine Scott: No; my understanding is that it does not. If it is within the EU, it applies.

Q3035 Chair: So if somebody was acceding to the EU and there was a cross-border scheme, it would then apply at the time of accession.

Christine Scott: Yes. As David mentioned earlier, there is usually some sort of agreement where directives would be implemented in a transitioned way.

Q3036 Chair: That is where the question of 10 years and so on rather than a shorter period comes in.

Christine Scott: Yes.

Q3037 Lindsay Roy: In the event of separation, given your professional expertise, how likely or realistic is it to expect Scotland to have a separate pension system up and running within 18 months, because that is the time scale we are talking about?

David Wood: As I intimated before, I do not think it is practical to have a wholly new system. Scotland would need to rely on something fairly similar to the UK system.

Q3038 Lindsay Roy: If not, how long in your view would it take to set up a separate system?

David Wood: In an independent Scotland there would be a lot of issues to consider. The pensions issue is only one of them. It would be up to the Government of the day to decide on the priorities for change. It is a "How long is a piece of string?" type of question.

Q3039 Lindsay Roy: Where would pensions be in that scheme of priorities?

David Wood: That would be up to the Government of the day.

Q3040 Lindsay Roy: And the population as well.

David Wood: The population would certainly want to ensure that its accrued rights and entitlements were respected and retained.

Q3041 Chair: A separate pension can be interpreted in two ways. One is the administration of the existing system or a completely different one. Is it practical to think of the administration of the existing system with no changes being established within 18 months? You have the election after that, and if somebody wants to make changes they can do so. Would you have the administration set up over a much longer period, which would mean you could not make political changes until a subsequent time?

Christine Scott: How pensions are administered would be determined by the law, so it is really about pensions law. Our feeling is that the law as it stands would probably need to be adopted in full for an independent Scotland, and then it would be a matter for the Government of the day to develop its policy towards pensions and evolve the system of regulation and law at that point.

Q3042 Chair: I understand that. Maybe I did not make myself clear. I appreciate that it would be for a new Government to change the policy and stuff. If you are moving from the existing UK-wide pensions administration system, how long would it take to have a separate Scottish administration of the pension system? Presumably, if Scotland wants to become separate, it will not want the existing system of administration.

David Wood: I suspect that could happen within 18 months, but there would be some real challenges. You would need to look at whether Scotland has the expertise or whether it would have to buy it in. I am a great believer that, if things need doing urgently and there is sufficient commitment, they could be done.

Q3043 Lindsay Roy: Is it not the case that it is further complicated because the UK is undergoing a process of pension reform at the present time, and that will continue for a period? How might that affect the implementation of any new system?

David Wood: That adds to the complexity, and in due course the Scottish Government would need to decide whether they picked up the new RUK arrangements.

Q3044 Lindsay Roy: That would lead you further to believe that 18 months is extremely optimistic to plan a new system.

David Wood: Potentially.

Q3045 Chair: It is all doable, even though it is difficult. As you say, it depends on how much time, effort and money you are prepared to put in to do it, but you would not hold up your hands and say it simply cannot be done because you would need a new computer system or something else. It seems to me it is all doable. Is that correct?

David Wood: ICAS is taking a neutral position in this debate. We are trying to raise the issues and inform the debate so that when the electorate come to the referendum they are taking an informed decision. We are approaching this from the point of view that most things are doable with the right commitment and resources. It is the practicalities that we just need to think about.

Q3046 Chair: Absolutely. Are there any practicalities of this transition that we have not picked up or of which we might not be aware, because, again, you know far more about this than we do?

Christine Scott: Because we published our report relatively recently we have not picked up any additional issues or at least raised questions about them. Perhaps one thing that is not covered in the paper, but maybe covered in some of our communications, is the issue of what currency your pension is paid in, but that is an issue that applies to a lot of other things as well, not just pensions.

Q3047 Lindsay Roy: You said that with the right commitment and resources it is achievable. What are we talking about here in terms of the right resources? What is the cost?

David Wood: I would not like to hazard a guess at the cost of setting up new administration systems. You would need the right people at the top with the right expertise and experience.

Q3048 Lindsay Roy: But it is not Mickey Mouse money.

David Wood: It is a fairly significant amount.

Q3049 Chair: What is a fairly significant amount for somebody like you?

David Wood: As an accountant, you might expect me to hazard a guess and give you some estimates, but, as an accountant, I ought to be reluctant to give you a figure that might be completely misleading, so I would rather not do that.

Q3050 Chair: Is it reasonable for us to expect the Scottish Government-those who are advocating change-to give us estimates of costs of transition, of which this presumably would be one, or somebody to have sat down and costed all this and, therefore, say to people, "Maybe you are going to have two or three lean years because we are spending so much setting up these new systems, but it will be nirvana after that"?

David Wood: That is a fair assumption. It should be feasible to have some indicative costs.

Q3051 Lindsay Roy: It is not just a fair assumption but a fair expectation.

David Wood: Yes.

Q3052 Pamela Nash: On currency, if, as some of us expect, a separate Scotland was not part of monetary union with the rest of the UK and did not have sterling and the Bank of England as a lender of last resort, how might that affect investment funds or pension funds in Scotland?

Professor Bell: Pension funds do invest across countries, but that is not a huge issue. There are all kinds of risks associated with pensions. This adds a risk, but it is not one that pension funds have not dealt with. The Danish state pension fund has bought into the UK infrastructure via the bad debts of Allied Irish Bank, so these things happen. It would not be true to say it does not add to risk, but it is not something insurance companies have not dealt with.

Q3053 Chair: Surely, things like that are happening within a stable framework. Coming back to Czechoslovakia, they started off with a common currency and within a matter of weeks it broke away because money flowed from one to the other. We do not know what the Scottish currency might be, but presumably the same thing is possible here. I would have thought that pension funds, which have a particular emphasis on security and stability, would want to move money out of somewhere where there was an element of risk. Therefore, they would tend to move it out of Scotland and put it somewhere where there was no danger. Does that seem reasonable?

Professor Bell: Broadly. You have to try to ensure that any arrangements about a new currency have the confidence of the markets so that the likelihood of capital flight is very low. That means all kinds of pre-commitments as a Government about the kinds of things you would be opting to do. You are right in the sense that pension funds want to be in a stable monetary environment and they are not going to relish investment in an unstable situation, but the way to avoid that is to have a clear agreement.

Q3054 Chair: I understand that. That is what a Scottish Government would want to do, but not many insurance companies will be investing their money in a bank in Cyprus, for example, because there is a possibility of something else happening there. Presumably, the prudent thing for accountants to say would be, "All these assurances have been given and we have no idea if they are going to be kept. Let us err on the side of caution." Prudence will determine that you just move your money out. Mr Bowie, surely if you were a trustee for any big funds, for example, in Scotland, hypothetically you would want to err on the side of caution by making sure you did not have any money at risk that you could possibly shift somewhere else.

Ronald Bowie: Indeed. Risk cuts both ways. To the extent that lots of pension funds are trying to make their assets grow, they are investing round the world. One of the features of the last 10 years is that they have been investing less and less in the UK, so most big pension schemes, to the extent they are investing in stock markets, are investing probably two thirds or three quarters outside the UK. In that sense, an independent Scotland would make no difference.

The much more dominant feature of what has been happening lately is that people are saying, "I’ve not got very many active members in the fund. They are not building up. I’m increasingly ending up with a pension fund that is just pensioners. I’ve got an obligation to pay them £1,000 or £10,000 a year, whatever the pension is, and I need to be very sure of that."

If I am paying in British pounds and want a lot of certainty that I can deliver that, the sensible thing to do is lend money to the British Government. As far as possible, all other things being equal, I will buy government stock, get income from that and I pay it out as a pension.

If an independent Scotland retains the British pound, with all the obligations and things that go with it, those pension schemes based in Scotland would probably still lend money to the British Government and pass through, because they could be confident of that. The real challenge comes if there is a Scottish pound. It is different, because presumably at the point of independence £1,000 a year of British pounds would be converted into £1,000 a year of Scottish pounds, and that becomes the obligation. If the Scottish pound falls or rises a long way in value versus the British pound, that will be to the misfortune or good fortune of the Scottish pensioners. A trustee would manage that risk by investing in the government stock and currency in which they are obliged to pay the pensions. If there is an independent Scottish currency, I imagine that a pension scheme based in Scotland, and paying out in Scottish pounds, would invest in the debt of the Scottish Government. If that was to the benefit of the members because the Scottish pound rose, then good for them, but it would see its risk in terms of its ability to pay out pensions in Scottish pounds. Therefore, the natural home would be Scottish government debt.

Chair: That is helpful.

Q3055 Jim McGovern: Can I ask Professor Bell a question and I have a feeling I possibly know the answer, but, for the purposes of clarity, what do you mean when you say "the risk of capital flight"?

Professor Bell: Capital flight is what has happened in some of the countries that have been caught up in the euro crisis-people have been moving their bank balances at short notice into other assets or under their beds. That is the sort of thing you want to avoid almost at any cost.

Jim McGovern: Thank you. I think that has answered it.

Q3056 Chair: We have come to the end of our questions. As I said before when I was ushering you in, we always ask people at the end whether or not there are any answers they have prepared for questions we have not asked, or any points you want to make sure you get on the record that you think we ought to be taking into account. Are there any points that you think we have missed? One of you said that you were just walking through this. We are stumbling through this, and we have to produce a report identifying the questions that we want both the UK and Scottish Government to have responses to. We have got your document, and you have given us a number of other points as well. Is there anything that maybe we have overlooked or has not been touched on so far?

David Wood: I think we have a fairly comprehensive examination of all the issues, and I am comfortable.

Ronald Bowie: There are some principles to be sorted out but huge amounts of practicality. This is primarily about implementation risk and implementation cost.

Q3057 Chair: I understand the point about implementation cost. What does implementation risk mean?

Ronald Bowie: The risk that stuff will fall through the cracks and there are circumstances not taken into account. You asked earlier about pensioners in Spain. If you think about the number of individual circumstances that people have, whether they are in state pensions, public sector pensions or private pensions, to get an implementation plan that covers all of those, and the many and varied circumstances of individuals, is extraordinarily complex and expensive.

Q3058 Chair: But people like you could do it.

Ronald Bowie: Yes.

Q3059 Chair: You are just building us up there to show how well you have done.

Ronald Bowie: I was not looking for a contract. It is extraordinarily complex. It is a bit like building an NHS patient record-keeping system where the implementation risk is enormous.

Professor Bell: I would like to put in a little ad at the end. We were having a discussion earlier today about exactly the question we touched on right at the end of our discussion: who would hold Scottish Government bonds, under what circumstances would they be created, and what would be the role of pension funds in this? I do not have the answer to that, but it is something that we, along with colleagues who are being supported by the SRC at the moment, are looking into, and we are hoping to come up with answers later in the year.

Chair: Can I thank you very much for coming along? As I indicated at the beginning, we intend to produce a report to establish the sort of points that have got to be clarified, particularly by the Scottish Government since they are the people who are advocating change but also by the UK Government. If there are other issues and, upon reflection as you travel northwards, you think, "Goodness me; I wish I had thought of that one at the time," by all means let us know and we will try to work it into the report. Thank you very much for coming.

Prepared 24th May 2013