Proposals for a Scottish National Pension & Investment Fund (NPIF) – A guest post by Jim Osborne

As the coronavirus pandemic continues to crush economies around the world we are currently witnessing a boom in the financial sector and continuing inflation of asset values. This is a clear indication that at some point in the past a tipping point was reached and the real economy and the financial sector separated into two parallel universes. This is a consequence of a long ongoing expansion in assets within the financial sector driven by pension funds, and the system which underpins pension provision around the world. The finance sector needs to be brought down to size and the global economy rebalanced. Serious reform of the pension system is essential to achieve this, so that pension savings are directed into productive investment in the real economy. The proposals in this paper are of wider relevance around the world but they have been developed here in the context of pension system reform for a new economy in an independent Scotland.

The following is the abstract of the full paper which sets out the proposals for Scotland and can be found in the documents collection on the Scottish Currency Group Facebook Page.

The proposals for a Scottish National Pension  & Investment Fund (NPIF) originated in 2013 in the run up to the first independence referendum of September 2014.

The debate about the need for Scotland to have an “Oil Fund” coincided with growing awareness of the carbon crisis and warnings that only 20% of the known global oil reserves could be exploited without pushing the climate beyond +2 degrees of warming.

The second proposition imposes a serious limitation on the first – Scotland simply can no longer afford to exploit all its oil and gas reserves and build an “Oil Fund” of any significant size if we were to fulfil our climate change commitments.

It was clear, however, that having a sovereign wealth fund to support a new Scottish economy was important. The proposals that were developed were, therefore, designed to create such a fund from the assets held by the pension funds that had been built up to benefit Scottish workers when they retire.

 The proposal was to create a single national fund through consolidation of these pension funds with a dual function of (a) investing directly in the Scottish economy (b) providing a pension of 80% of earnings for all citizens.

A new investing paradigm was proposed for the NPIF, based on the familiar process of investment in real estate and infrastructure, where the investment is made in return for negotiated shares of the cash flows generated by the enterprise. The investing model is known as “Evergreen Direct Investment” (EDI) and is a form of direct equity investing, distinct from the more familiar buying and selling of shares through securities markets.

Creating the NPIF addresses several key flaws in the current pension system

  • Investment risk is transferred from employers who provide DB schemes and from individuals who bear this risk in DC schemes – the investment risk is collectivised.
  • Collectivising risk means companies can allocate their capital to running the business without having to fund pension fund “deficits”.
  • EDI investing will involve the withdrawal of capital from the securities markets where enormous volumes of stocks and shares are traded in secondary markets and asset values are completely detached from conditions in the real economy where productive activity creates use value for people.
  •  The formation of the NPIF will define its legal and constitutional status, replacing the current influence of the law of “fiduciary duty” with a legal duty to serve the interests of all of Scotland’s citizens collectively and individually. The NPIF will be accountable to the people through Parliament for its decisions and its performance.
  • The NPIF will be underwritten by the state and, assuming Scotland has its own currency, the Scottish government will have the means to provide additional capital to the fund in the event of short term liquidity challenges. This means that assessing fund adequacy no longer requires triennial “valuations” of the fund balance sheet to determine the multi-generational values of assets and liabilities and measure the extent of any “deficit”. The adequacy of the NPIF can be assessed simply by cash flow accounting over immediate vnd near term timescales.
  • EDI investing is a cash flow based investment paradigm through which the negotiated sharing of enterprise revenues can be matched with predicted outgoings from the fund so that cash flow in = or > cash flow out.

The pension benefits side of the fund are designed to deliver a pension of 80% of earnings at retirement by combining an NPIF based pension with a supplementary state pension.

The design parameters need to take into account the following factors

  • The dependency ratio (the number of workers compared to the number of pensioners)
  • The start date for contributions (scheme membership) and a defined normal retirement age (this then specifies the maximum  number of pensionable years of employment)
  • The accrual rate – the rate at which pension entitlement builds up each year
  • The contribution rate and how this is shared between employee and employer
  • The balance between the contribution of the NPIF component of total pension and the state contribution.

The following values are proposed for the scheme

  • Pensionable period of employment 20 until 65 but with a maximum of 40 years
  • An accrual rate of 1/80.
  • A contribution rate of 24%[1]

These factors produce a scheme with the following outcomes for a range of earnings

wageAccrual 1/80syrs of workNIPF pensionstate % top upstate pensiontotal pension% wage

[1] The contribution rate could be much lower depending on the dependency ratio, which would require detailed demographic modelling. It is possible that with a 3:1 worker/pensioner ratio that a contribution rate of 18% would be sufficient.


  1. Michael G -

    I posted this to the Scottish Facebook group

    For a number of years, I was a trustee of a pension scheme closely similar to the Universities Superannuation Scheme. It was a constant source of surprise to us that our scheme was consistently viable, whereas USS was in continual crisis. A few days ago, I was talking to another former trustee, who pointed out something I had never realised. Our scheme was single employer whereas USS is multi-employer. Universities were gaming the system. In particular, they could award a “long overdue” promotion and generous salary increase shortly before retirement, providing an employee with a benefit, largely paid for by other universities. I don’t think a final salary multi-employer scheme can ever work.

    Furthermore, although I am the fortunate beneficiary of a good final salary scheme, I don’t think they can ever be fair, even with one employer. Those on flat salary scales will always be subsidising those on steeper salary scales. Worse, if the proposed Scottish fund had different types of employer, then one employer would always be subsidising another employer’s pensions.

    Having said this, I think a fair scheme is feasible. A contribution of one Scottish pound would entitle the employee to a pension of defined actuarial value. The actuarial value could increase by say RPI+2% p.a.. The pension payable at a given age would be determined by the actuarial tables at the time the contribution was made. If the actuarial tables changed, this would not apply to contributions already made.

    1. Jim Osborne -

      You should read the full proposal Michael. This article is only an abstract. JIM

    2. Jim Osborne -

      Michael, your concern about gaming the system is well founded. One measure to minimise this would be for the administrator to review pay over the previous 10 years to establish whether there is anything anomalous about the final year and if so to investigate before confirming the pension. Jim

  2. Peter May -

    I’m certainly not a pension brain.
    And although I tend to consider that money is created by government so we don’t in fact need pensions, we are where we are and it seems to me this proposal has the chance of diminishing the financial clout of the pension sector.
    Which is certainly a plus.
    What I really like about anyone buying bonds is that anyone so doing has to invest in a certain sector. So thus that sector – say improving railways or industrial insulation – will either happen or the bonds will be worthless.
    That’s a great incentive to do whatever the bonds require – and not be dependent on government differing preferences.
    To me that is bond security.
    And it seems also to be effectively an anti ‘pure MMT’ proposition!

  3. Graham -

    While a total pension of around 80% of earnings seems about right to me, I think pension reform – which is badly needed with State pension, one of the lowest in Europe, though better when topped up by benefits – needs to go hand in hand with reforms to wages. Since Thatcher we have become a low-wage economy while at the same time there is a small group making millions.

    Not only should the floor be raised, the ceiling should be lowered too, such that there is a differential of around 1:10 between the highest paid and median wages.

    Wealth inequality needs to be tackled as well – no one needs mega millions or billions, while others have to use food banks and ordinary wages earners pump money into charities at a greater rate (proportionately) than the rich to make up for the effects of disaster capitalism.

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