Pension scheme managers and industry experts are focusing on tax and cross-border funding requirements as challenges that could arise out of next month’s Scottish independence vote, regardless of the outcome.
A National Association of Pension Funds survey, conducted in June, found 95 per cent of funds were unsure about how they would be affected in the event of a Yes vote in September. But industry experts said a No vote could also bring challenges.
If you have a different environment post-devolution, then it would make sense that you would want to tailor your employee benefits package differently
Marcus Hurd, Buck Consultants
Pensions commentators said a vote in Scotland to depart the union could lead to the division of current schemes based on where employees work. Further devolution, promised by the UK’s three main political parties if a No vote is returned, could have a similar, albeit lesser, impact.
“Quite a lot of people have a watching brief on Scottish independence,” said Zoë Murphy, partner at law firm Sackers. But she said uncertainty about a range of issues, including whether an independent Scotland would join the EU, was preventing schemes from formulating a specific strategy.
Some schemes have undertaken contingency planning, but were wary of influencing Scottish voters by announcing their strategies at this stage. Several large cross-border employers felt it would be inappropriate to comment.
Some said they would use the gap between the referendum, in September 2014, and the proposed date for independence, in March 2016, to develop a strategy. Much of the debate so far has centred on the EU directive requiring cross-border schemes to be fully funded at all times.
While trustees will welcome increased funding, the NAPF said that application of this rule would be likely to lead to the closure of most cross-border defined benefit schemes.
The Scottish government has said it plans to negotiate with the EU on this issue. A spokesperson said: “We are confident that it will be possible to agree sensible and practical transitional arrangements which will provide sufficient flexibility for employers, whilst ensuring that scheme members and beneficiaries are protected.”
But Nicola Rondel, of counsel at law firm Hogan Lovells, said: “In practice, many schemes have a rule which terminates members’ active membership if they become employed by a ‘European employer’.”
Split landscape
Employers in the UK would therefore, regardless of Scottish negotiations, have to find ways of delivering the same employee benefits outside of their current schemes.
A recent white paper by Buck Consultants
suggested the cost of setting up a new pension scheme for Scottish employees would be significant, and added smaller schemes might “suffer reduced economies of scale”.
Marcus Hurd, head of client management at the consultancy, suggested schemes might face similar changes if taxation is significantly different across the border.
“According to the tax system, or other economic policies or social policies in place within each geography, you would tailor your employee benefits package to take advantage of, or promote, whichever aspect’s most favourable,” he said.
The three main UK political parties have also pledged to give Scotland further tax-varying powers if it decides to remain in the union.
“If you have a different environment post-devolution then it would make sense that you would want to tailor your employee benefits package differently north of the border to south, in which case you’d end up with two different schemes,” said Hurd.
Duncan Lamont, principal in Aon Hewitt’s asset allocation practice, felt schemes should not worry too much about the impact of the referendum on investments.
“The Scottish independence debate has been very much in the newspapers and on people’s minds, but the markets so far are not reacting hugely,” he said.
A BlackRock white paper suggested that Scottish gilt yields might be higher than their UK counterparts, if Scotland decides to become independent. However, it added that maturities would be shorter.
Nonetheless, there are certain risks for investors, particularly the dispute over Scotland’s share of the national debt. “The Yes campaign’s threat to walk away from Scotland’s share of the national debt if Westminster does not permit a formal currency union is therefore not an empty one,” said Lamont.
