3 days ago
How pension savings could be an indy Scotland's ‘wealth fund'
A national pension fund (NPF) would be a large mutual fund owned by Scottish citizens as distinct from a state-owned sovereign wealth fund.
It could be established in law based on mandatory 'auto-enrolment' of all new employees starting work for the first time, with all employers and employees paying contributions into the fund.
These contributions would provide entitlement to an earnings-related pension but would also build up a large fund that could be invested to support the Scottish economy and the execution of Scottish Government industrial strategy.
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We need to be clear that pension savings give rise to future financial claims upon the resources and productive capacity of the economy.
Unless the economy is capable of meeting the needs of everyone in the future, we are storing up a crisis and conflict over access to goods and services. Pension savings need to be used primarily to support the productive capacity of the economy instead of being allocated for speculation in financial markets.
The NPF would quickly build into a substantial fund. The contributions made by new employees would not be drawn down to pay pensions for 40 years or more. Once established, existing workers could be offered the option of transferring in their second pensions.
For those with defined contribution pensions, there would be a strong incentive as transferring into the NPF would give them rights to an earnings-related pension. Transfers in would increase the size of the NPF even further. The fund would need to be structured so that there was a 'buffer fund' of cash available to meet operating costs and pay out pension benefits.
Workers who had transferred in would reach retirement age earlier than the founding auto-enrolled membership, so after a few years the NPF would need a certain amount of available cash to pay pension benefits.
Funds in excess of that required to maintain a buffer fund (Fund A) could be allocated for productive investment.
Fund B could be designated for investment in government and corporate bonds, a liquid form of financial asset that can be quickly redeemed for cash if necessary to supplement the buffer fund.
Fund C could be allocated for direct investment in infrastructure and in the form of partnerships with businesses, giving the NPF direct equity stakes in individual companies.
This fund would play a central role in giving the general public a direct stake in business and infrastructure and form the basis of what could be described as 'mutual capitalism'. Fund D would allocate any remaining funds in tradeable shares with an emphasis on the holding of shares in Scottish companies and taking stakes in foreign companies operating in Scotland.
Funds C and D would contribute to the process of taking back control and ownership of our national assets and resources. Funds B and D would rely on there being a Scottish Stock Exchange to facilitate their activities.
The funds of the NPF could be enhanced further by allocating revenues derived from the management of Scotland's resources. Initially this might be limited to tax revenues, for example from foreign companies operating in the energy sector.
However, over time, as Scotland regains ownership and control over our own resources, the higher revenues could also be used to supplement the funds of the NPF in addition to the share of profits the NPF derives from direct investments in infrastructure and equity partnerships.
A NPF would constitute a strategically important part of Scotland's future financial architecture and its evolution would have a significant impact on the Scottish asset management industry.
A substantial shrinkage of that industry would be likely, but that would be compensated for with the creation of highly skilled, well-paid jobs needed to drive the successful business partnerships which are central to the NPF's purpose as an investor.
The administration of an earnings-related pension system, of which the NPF would be a critical part, would also create well-paid jobs in activities such as financial advice, IT systems development and co-ordination with the tax and welfare systems and related government departments.
In out next column I will outline how the NPF could be designed as a provider of earnings-related pensions for all Scottish citizens, integrated with a new state earnings-related pension.
