Officials declared there would be no change in the rules governing cross-border pension schemes – despite a widely held belief that the regulations were to be relaxed. Finance secretary John Swinney was among those who expected the European Union to make the change.
At present, many schemes are under-funded, as contributions from staff and employers have been insufficient to pay for pensions.
In contrast to cross-border schemes, single-country pensions have the flexibility to go into deficit as long as they are able to continue making payments to members of their schemes and there is a long-term plan to get out of the red. Yesterday’s ruling means that if Scotland becomes independent, firms would have to ensure pension funds for workers north of the Border were “fully funded”.
One expert warned the ruling would mean firms having to plug a pensions blackhole of as much as £225 billion after independence.
At the end of last year, there were strong hints from European officials that the fully-funded condition for cross-border schemes would be abandoned when the EU’s 2003 pensions directive was reviewed. Those hints were reflected in comments made by Mr Swinney earlier this month, when he claimed the EU was on the point of “resolving” cross-border pensions.
But yesterday’s directive, published by internal market commissioner Michel Barnier, quashed those hopes. It said the requirement for cross-border schemes to be fully funded at all times should be retained without change.
David Wood, executive director of the Institute of Chartered Accountants of Scotland, said it had been estimated there were some 6,300 defined-benefits schemes in the UK, of which about 5,000 were in deficit.
The total deficit, he said, was about £300bn. Assuming three-quarters of these pension schemes were across England and Scotland and would have to be redefined as “cross-border” ones after independence, that would leave a gap of £225bn that would have to be plugged by companies.
“We are talking about huge figures,” Mr Wood said.
“Any requirement to make good that deficit before independence in March 2016 would impose a real crisis for some employers and could put some companies at risk.
“Companies could try and borrow, but that’s not necessarily that easy. Banks would not necessarily lend to some companies. It is an awful lot of money to be sucked out of the corporate sector into pension schemes.”
Concern was also expressed by the National Association of Pension Funds, which represents 1,300 pension schemes and assets of £900bn.
Chief executive Joanne Segars said the announcement had “major implications for pension schemes as part of the debate on independence for Scotland”.
She went on: “The big surprise is that the EU will continue to require cross-border schemes to be fully funded – a significantly more demanding level of funding than is expected of single-country schemes.
“The European Commission had been expected to relax these special cross-border requirements, but it has disappointed many observers by leaving this part of the pensions directive unreformed.
“The knock-on effect of this is that schemes with members both north and south of the Border would become much more expensive to run if Scotland were to vote for independence.”
Labour’s shadow pensions minister, Greg McClymont, said: “The pensions system in the UK works well through the pooling of resources, where the rewards are shared via sensible and efficient risk-sharing. This protects the pensions of Scots who have worked all their lives to enjoy retirement.
“The EU has today confirmed that Scottish company pension schemes must overnight, if we leave the UK, fill a huge funding blackhole. The implications for Scots who are members of these pension schemes, and for the companies themselves, are huge. It’s now clear beyond doubt that independence puts the pensions of hard-working Scots at risk.”
He added: “Filling the pensions blackhole would come at huge cost to the companies and their employees, or would mean the break-up of these pension schemes. Scots have a choice – believe the experts or believe Alex Salmond on pensions.”
The Scottish Government said it had repeatedly pressed the UK to discuss the issue and instigate formal talks with the European Commission.
A Scottish Government statement said relaxation of the cross-border funding rules was supported by the pensions industry across Europe, and it pledged to make the case for action on the issue when the new commission took office later this year.
The Scottish Government statement added that its white paper on independence “set out our proposals for an affordable, fair and efficient pensions system in an independent Scotland”.
It went on: “We considered in detail the impact of EU rules on defined-benefit pension schemes that currently operate in Scotland and the rest of the UK if they continued to operate, on independence, on a cross-Border basis.
“We clearly set out our view, informed by practice in Ireland under the current regime, that a scheme which became cross-border on independence should be allowed to implement its existing recovery plan in accordance with the period originally set for it, rather than having to achieve full funding over a much shorter timescale.
“This remains the case, regardless of the fact that the commission has deferred plans to encourage the growth of cross-border schemes by relaxing the funding regime.”