Out-Law / Your Daily Need-To-Know

Out-Law News 2 min. read

'Mammoth task' to split pension funds for companies operating in an independent Scotland, says expert


Forcing companies which operate across the UK to split their pension schemes into separate 'Scottish' and 'English' funds post-independence would be a "mammoth task" with few benefits, a pensions expert has said.

Ian Gordon of Pinsent Masons, the law firm behind Out-Law.com, was commenting following the publication of a report by the Institute of Chartered Accountants Scotland (ICAS) (20-page / 465KB PDF). The industry body has warned that EU rules on the funding of cross-border pension schemes could lead to "major cost and cash flow implications" for businesses.

Speaking at First Minister's Questions last week, Alex Salmond promised that there would be "no difference" to the length of time companies were given to pay off their pension deficits after independence, regardless of EU rules on cross-border pension fund solvency. He said that the Scottish Government would look at three solutions proposed by ICAS, one of which involved splitting existing schemes into separate ones to cover Scotland and the rest of the UK.

Gordon said that the ICAS report "just scratches the surface" of the many complex issues which will need to be addressed by UK companies operating workplace pension schemes in the event of a vote in favour of Scottish independence in September 2014.

"The reality is that any attempt to unbundle and separate out UK pension schemes into new Scottish and non-Scottish schemes would be a mammoth task taking years to plan, execute and complete," he said. "It is difficult to see how anyone other than those given the task of achieving that goal would ultimately benefit from it."

"Realistically, even if only as an interim measure, some relaxation of the stringent cross-border rules would be essential. An independent Scotland would need time to work out exactly what new bodies would be necessary to regulate and protect the private pensions of an independent Scotland, and to put in place all the minutiae of the legislation needed to make it all work," he said.

Gordon added that splitting pension funds would also result in additional professional costs for companies, as well as the loss of "economies of scale". "It is difficult to see UK employers being enthusiastic about being forced to carve up their UK pensions when the general trend is to batten down pension costs wherever possible," he said.

Defined benefit (DB) and hybrid pension schemes in the UK are governed by solvency rules set out in the EU's Institutions for Occupational Retirement Provision (IORP) Directive. Under the IORP Directive, schemes operating across borders are subject to stricter rules than those that operate within a single member state. Cross-border schemes must be funded in full, with any underfunding rectified immediately. Although many UK DB pension schemes are currently in deficit, they are able to rectify underfunding through staged recovery plans agreed with the Pensions Regulator.

According to the ICAS report, if Scotland was to become an independent country then any schemes which operate in both Scotland and the rest of the UK would become cross-border schemes. ICAS pointed out that cross-border schemes operating in the UK and the Republic of Ireland were given three years to comply with the requirements; however, it warned that many UK schemes were currently operating recovery plans spanning 10 years or longer.

ICAS said that an independent Scotland with EU membership would have three options to implement the requirements of the IORP Directive. If Scotland was unable to seek an exemption for existing UK-wide pension schemes or agree a "grace period" long enough for schemes to fulfil their requirements, schemes would have to be split into Scottish and rest of UK versions.

The Scottish Government will also have to consider how pensions will be regulated and members' benefits protected following independence, ICAS said. Its report concluded that sharing institutions such as the Pensions Regulator and Pension Protection Fund "may be an option in the short to medium-term", but that "consideration would need to be given as to whether there were any specific legal barriers" to this arrangement.

Pensions expert Ian Gordon said that when publishing its own proposals for dealing with cross-border pension schemes, the Scottish Government should remember that the "objective of the exercise ought to be protecting members' benefits".

"This may be better achieved by retaining and, if necessary, adapting existing structures rather than adding new ones," he said.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.