Natasha Browne looks at what an independent Scotland would mean for occupational pension schemes
The Scottish independence debate is set to heat up as the referendum draws closer. Voters will take to the polls on 18 September to give their verdict on whether or not the northern corner of Great Britain should remain part of the UK.
In its report Pensions in an independent Scotland, the Holyrood government committed to auto-enrolment (AE). It also said it would set up an equivalent to the National Employment Savings Trust (NEST) (PP Online, 23 September 2013). The Scottish government also revealed plans for a more generous state pension. It said it would launch a weekly state pension of £160 and increase it in line with any higher provision offered south of the border.
In response, the Institute and Faculty of Actuaries (IFoA) called for evidence-based analysis of the policies to be provided to support the proposals. The IFoA warned that AE would be largely completed by the time Scotland became independent in the event of a ‘yes' vote. This would leave many Scottish companies with pension plans already in place under the UK system (PP Online, 25 October 2013). It also raised concern that a Scottish equivalent of NEST would be expensive to create.
The currency debate
The IFoA stated that knowing the future currency of an independent Scotland was important to the debate, as well as where it stood in relation to the EU. Last week, Towers Watson published a paper stressing the need for certainty over the currency question (PP Online, 17 June). Although Westminster has rebutted claims that an independent Scotland could keep sterling, it is unclear what would happen in reality. Clarity over whether Scotland would keep the pound, adopt the euro or create its own currency is fundamental to pension planning, according to Towers Watson. It said a switch away from the pound would have an impact on financing, benefit delivery, investment strategy and risk management.
A study carried out by Punter Southall earlier this year found 53% of industry figures supported retention of sterling in an independent Scotland (PP Online, 28 February). A quarter of trustees, managers and employers said it should create a Scottish currency, while 15% believed it should adopt the euro. Some 64% feared its pension provision would be worse off if it exits the UK, while half agreed it should set up its own Pension Protection Fund (PPF) if it opts for independence.
Separate research from JLT Employee Benefits found 32% of Scottish businesses would support the continued adoption of AE and a NEST equivalent in the event of a UK exit (PP Online, 5 February). The JLT 250 Club report also found 49% backed the idea of a Scottish pensions regulator and a separate lifeboat fund if voters choose to leave the union.
The cross-border question
Over a year ago, the Institute of Chartered Accountants of Scotland (ICAS) pointed out an independent Scotland in the EU would lead to complications over cross-border solvency. Defined benefit (DB) and hybrid schemes operating north and south of the border would have to be fully-funded at all times (PP Online, 26 April 2013). Under current interpretations of the law, actuarial valuations would have to occur annually rather than triennially, and staged recovery plans would be banned.
The National Association of Pension Funds (NAPF) said the cross-border problem would lead to increased closures of DB schemes (PP Online, 21 November 2013). According to the JLT 250 Club report, 27% of businesses would operate different schemes for Scotland and the rest of the UK to avoid the EU cross-border funding regime. A further 26% would ensure their scheme was fully funded, while 13% admitted they would wind up their plans. Thirty-four percent were undecided. Punter Southall's study showed 40% of the industry thought cross-border schemes would have to be fully-funded at all times. Almost a quarter said a ‘grace period' would apply in line with The Pension Regulator's (TPR) regime.
The tax system
The NAPF has also urged an independent Scotland to avoid altering its pensions tax relief regime. Any changes to the pensions tax relief policy in Scotland would have cost consequences for schemes with employees across Great Britain. This is because they would be likely to manage separate pay-as-you-earn (PAYE) and corporate tax assessment and collection systems, the NAPF said. Towers Watson's paper also warned compliance costs would increase with different tax systems in Scotland and the rest of the UK. It highlighted that Scotland was set to gain more tax powers from 2016 regardless of the outcome of the referendum, however.
Finally, Standard Life has put contingency plans in place to relocate its operations should Scotland vote to leave the UK (PP Online, 27 February). Alliance Trust has also started worked to establish additional companies registered in England to help offset uncertainty arising from the referendum.
But if big companies are putting contingency plans in place, it looks like schemes do not know how to prepare. Research published by the NAPF this month showed 95% of them think the impact of a yes vote on them is not clear (PP Online, 12 June).
The Budget 2014 knocked the industry sideways with its revolutionary changes to defined contribution (DC) pensions. With less than three months to go to the Scottish referendum, the industry faces even more uncertainty over its future.
Five key issues facing pensions if Scotland says ‘yes'
• Scotland and the rest of the UK need to make a decision on how protection provided by the PPF would be managed
• Buy-out strategies would be impacted by the changing relationship between the Scottish and British bond markets
• Annuity pricing would have to deal with potentially different gilt structures, watchdogs and demographics
• Administrators with Scottish and other UK members would have to adhere to separate legislative and regulatory regimes
• Benefits would have to be tracked in dual currencies if an independent Scotland did not keep sterling
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