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09

Scotland 'would face £1.1bn public sector pension black hole'

Open-access content Thursday 18th September 2014 — updated 5.13pm, Wednesday 29th April 2020

Rising costs of public sector pensions would likely impose a significant £1.1bn pressure on an already strained Scottish budget, a Centre for Policy Studies report has warned.

The think-thank cast doubt over the economic viability of an independent nation as people in Scotland today vote on whether their country should become a self-governing nation or stay in the UK.

CPS economist Tim Morgan said the Scottish budget was already stretched by declining oil revenues and the probable haemorrhaging of tax revenues from financial services. Forecasts indicate that Scotland could face a £1.1bn black hole in 2015/16.

He said: 'As anyone familiar with the issues knows, the system which pays pensions to public sector workers in the UK is a Ponzi scheme. In the private sector, pension provision is "funded", which means that savers' contributions are invested to pay for those same contributors' own future.

'With some minor exceptions, however, UK public sector pensions are "unfunded", which means that no money is put aside to meet future obligations.

'Instead, current contributions are used to pay current pensions, and workers of today will receive their pensions from the contributors of tomorrow.'

Morgan said that the gap between payments and contributions would soar to £11bn in 2015/16, 'a number three times bigger than it was just three years earlier'. Based on current trends, the public sector pension gap is set to widen to almost £18bn by 2019/20.

Scotland is particularly exposed to this trend because the public sector workforce is proportionately larger north of the border than it is in the rest of the UK, the CPS said.

Morgan suggested ways to offset the cost: reducing in pension payments and/or raising the public sector pension qualifying age; increasing the contributions of current public sector workers; and increasing the contribution from general taxation.

He said: 'The particular problem for an independent Scotland would be that this issue is likely to arise sooner north of the border than it will in the rest if the UK.'

This article appeared in our September 2014 issue of The Actuary .
Click here to view this issue

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