Donald Campbell explores what a ‘yes’ vote for Scottish independence could mean for pension schemes

Any major change brings opportunities and risks. However, for the Scottish electorate this poses them on a scale that has not been seen for 300 years. If the Scots vote for independence and it is granted, there could well be major new opportunities for employment in the public sector, pension and tax consultancies, investment managers and merchant banks.

Taking an apolitical stance, we are going to concentrate here on the private sector implications where, even in the ‘conservative’ world of pensions, Scottish independence could usher in unprecedented structural and reorganisational challenges.

There would certainly be a number of opportunities to reconsider the ongoing appropriateness of existing UK institutions and the way in which pensions are delivered. In addition to this, we could see changes to the way in which we view tax reliefs, intergenerational resource transfers and public sector debt structures. Merchant banks would welcome the opportunity to advise on structures for issuing Scottish government debt.

The relationship between private sector and public sector obligations could also come under review.

Indeed a completely new institutional framework will be required to supervise and deliver pensions, even if the existing UK authorities agree to provide assistance. There will be both costs and benefits to this upheaval. On the one hand, there will inevitably be cost increases due to lost economies of scale. On the other hand, however, the opportunities will be welcomed within the pension and tax consulting environments as advice and re-organisations will generate work. This will be true not only in Scotland, but also in other parts of the UK where pension scheme members may well be domiciled in Scotland.

From 6 April 2016, there will be potential payroll tax changes required under the Scotland Act 2012 and those employees and pensioners domiciled in Scotland for tax purposes should therefore be identified together with the changes required to payroll systems.

A major consideration will be choice of currency. Given current economic challenges which are likely to continue through to 2014 and beyond, the risk of a rise in interest rates and the resultant drag on economic growth would seem to rule out any thoughts of establishing a new currency. Thus the most likely outcome would be that monetary policy and banking supervision will be dictated either from London or Frankfurt.

If sterling is maintained as the currency, then a separate fiscal policy will require different tax and national insurance regimes. There would be implications for payroll systems and treasury functions, in what would become cross-border pension schemes, bringing opportunities for software houses and pension consultancies.

Depending on the chosen tax regime and social security regime, staff will need to brush up on new skills, and new systems will have to be implemented. The whole administration system across Scotland would have to succumb to a complete overhaul, and this is where specialist pensions administrators could play an invaluable role.

UK pension schemes are already subject to a wealth of legislation, case law and regulation arising from the EU, the UK legislature and judiciary. There are profound implications for:

• bodies such as a Scottish Pension Regulator, PPF and HMRC
• asset-backed funding via Scottish partnerships
• a Scottish-based stock exchange
• professional bodies

All aspects of which would require to be reviewed. In particular, clarity would be required in relation to whether Scottish or UK jurisdiction would apply to particular schemes.

But perhaps the greatest impact for pensions in an independent Scotland will come from European cross-border issues. If an independent Scotland was admitted to the EU as a member state in its own right, the IORP Directive would require all schemes located in Scotland accepting contributions from an employer located in the rest of the UK (or vice versa) to apply for authorisation as a cross-border scheme. Successful authorisations would come with stringent funding requirements.

A ‘yes’ to Scottish independence is going to make huge waves across the pension industry both in Scotland and the remainder of the UK. Yes, it is going to increase employment, but equally it is going to be costly – in terms of time, management and the necessity to implement new systems. One conclusion that appears inevitable is that schemes would separate out Scottish domiciled liabilities.

Written by Donald Campbell, principal consultant, Xafinity Consulting

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