Abolish state pension for contributory scheme says Scottish think tank

Reform Scotland, an independent think tank, has proposed the establishment of a new funded pension system to replace a phased-out state pension.

The proposal, which covers the entire UK and is not a post-independence policy proposal, calls for all workers to be required to contribute a minimum of 8 per cent of their salary into a pension pot that is chosen and owned by the worker, and is fully transferable. Reform Scotland says the system needs to be reformed whether the Scottish public vote for independence or not.
Retirement age would be chosen by the worker at any time after 60 and contributions into the plan, dubbed the Universal Contributory Pension (UCP), would attract a flat rate of income tax relief.
Pensions Credit would continue to provide a minimum guarantee under the plan.

As part of the UCP, employee National Insurance would be scrapped and income tax will initially be increased by 7p to cover the decrease in revenue. In addition, the personal allowance will be increased to £12,000 and the tax system will be rebalanced in other ways to ensure it does not penalise lower earners.

The UCP would apply to all workers in the public and private sectors. The state pension would be phased out over 45 years, and public sector Defined Benefit schemes would be closed for new members and stop accruing for existing members.

These would be replaced, in a phased way, by the UCP, providing more equality between, and security for, public and private sector workers. Public and private sector workers alike, with their trades unions, could negotiate the terms of the contributions made by their employer.

Reform Scotland says that the current pension system – including the state pension and public sector occupational pensions – means current workers, especially younger ones, have no idea at what age they’ll be able to collect a state or public sector pension or how much they’ll get.

The think tank argues that NI contributions and employee contributions almost entirely pay for today’s pensioners, whereas a funded system would remove fears of intergenerational cross-subsidy.

It argues that current pensions are unsustainable, with the state pension already comprising 14 per cent of Scottish public sector expenditure and Scottish public sector pensions taking up 8 per cent of the Scottish Government’s budget.

Reform Scotland chairman Ben Thomson says: “The key problem with our pension structure is that those faithfully paying National Insurance and those paying into a public sector occupational pension scheme have no ownership over their pension assets. They are not paying into a personal pot for themselves – they are paying for today’s pensioners and are dependent on an increasingly stretched next generation to pay for them.

“This is hugely insecure and unsustainable. It’s time to grasp the nettle on pensions and end the conspiracy of silence that exists in all political parties on this issue.

“The Universal Contributory Pension will be a mandatory, fully-funded system which will offer workers security and certainty and provide a sustainable solution for the country’s finances.

“The UCP will take power away from politicians and give it to people. It will ensure that workers have control of their own circumstances in retirement, including the ability to retire anytime after they turn 60. And it will free the next
generation of the burden which our pensions system places upon them.”