'False premise' state pension should be scrapped, says think tank Reform Scotland

Instead, the non-aligned, right-of-centre think-tank has proposed that workers should pay a mandatory percentage of their salaries into a new “defined contribution scheme”, which could be funded by reforms to the tax system and would be independent of the state.

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The body’s chairman said successive governments had only tinkered with the pension rules but that what was required for future challenges was a new system, which would “take power away from politicians and give it to people and it will free the next generation of the burden which our pensions system places upon them”.

But one leading anti-poverty group said Reform Scotland’s proposals would disadvantage whole sections of society who, for a number of reasons, did not have a full working life.

Successive reports have warned how Scots are facing a pensions time bomb with few people saving enough for a comfortable retirement. Recent research even stated that the average working age person faces a £435,000 shortfall in their pension pot if they want to retirement to meet their expectations.

The issue was also central to the 2014 independence referendum, with uncertainty around pensions cited as a reason why many older voters opted to remain part of the UK. With a second independence poll back on the agenda, pensions are going to be another referendum battleground.

The state pension already accounts for around 15 per cent of Scottish public sector spending, while Scottish public sector pensions take up eight per cent of the Scottish Government’s budget, with a 25 per cent increase in the number of pensioners expected in the next 20 years.

Reform Scotland said its Universal Contributory Pension (UCP) proposal would be a “mandatory, fully-funded system ,which will offer workers security and certainty and provide a sustainable solution for the country’s finances”.

Chairman Alan McFarlane said: “Today’s stretched workers are paying for their parents’ pensions, not their own, and there is no certainty at all over when and on what terms these workers will receive a state pension, if indeed they will at all.

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“This is unfair and clearly unsustainable, with an increasingly smaller workforce being asked to pay increasingly more for an increasingly larger pensioner population.

“For too long politicians have decided to leave it to their successors to deal with. There is a conspiracy of silence among our political leaders, of all parties.”

Under the UCP proposal, instead of National Insurance workers would pay a mandatory percentage of salary into a defined contribution pension scheme of their choice, which could start paying out at the age of 60.

The state would provide a means-tested, minimum guaranteed income in old age, as it currently does through the Pension Credit. All public sector schemes would close for new members and stop accruing for existing ones.

The money that individuals paid into the new scheme, in addition to government tax-relief, would become their pension pot, with the upshot, the think-tank said, everyone would know how much their pot was worth and how it was managed.

Reform Scotland said the mandatory salary contribution would start at eight per cent, rising to at least 10 per cent over time, with employees allowed to top up their pensions to bring the total contribution to £20,000 a year.

But Poverty Alliance said that while there was little doubt the state pension scheme was under stress and needed changed, the source of the problem was being overlooked.

Director Peter Kelly said: “Behind our pensions crisis is not that we have an ageing population, it’s that we have an increasingly unequal society, one that cannot deliver stable and decent employment for thousands of people throughout their working lives.

“The kinds of changes being proposed here would potentially disadvantage women, people with disabilities and those who are out of work through no fault of their own.

“Many people are unable to take part in paid employment because of other unpaid caring responsibilities. This work is already undervalued and these proposals would make it even more so.

“The welfare state is supposed to provide support from the cradle to the crave, as citizens we should value and protect this principle.”

Steven Cameron, director at Edinburgh-based pension, insurance and investment firm Aegon, said “intergenerational fairness” had to look beyond just pensions.

Mr Cameron said: “It needs to look at housing market as well. I don’t know if younger people are aware that they won’t be well off. They can’t assume that they will be better off than their parents or grandparents.

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“People who are retired will say that they went through periods of difficulty and had to work hard. Today’s younger generation has a particularly long list of financial challenges that previous generations didn’t face.

“There’s a growing realisation of that but I don’t think that people have drawn the connections. It’s a very political thing.

“At the moment because it’s the older generation that tend to vote politicians are reluctant to tackle this issue.”