Scottish independence: Pension and savings warning

Treasury report will be launched by Scottish Secretary Michael Moore. Picture: Esme Allen

The paper on the impact of independence on financial services warns that Scotland would struggle to provide protection that would match schemes such as the UK’s Financial Services Compensation Scheme (FSCS), which protects deposits in UK banks up to that figure.

It states that members of defined benefit pension schemes would not be covered by the Pension Protection Fund (PPF), with an independent Scotland required to provide such protection through a similar guarantee fund under EU rules.

The paper will say that under independence it would be “difficult and expensive” to replicate the scheme, funded by levies on banks, due to Scotland’s smaller banking sector and tax base.

The claims were made as the SNP government prepares to publish its own paper setting out the “strengths” of key sectors of Scotland’s economy as part of the economic case for independence.

Alex Salmond and Nicola Sturgeon will tomorrow set out the report, which will “explore the key strengths” of Scotland’s economy in life sciences, creative industries, food and drink, renewable energy and tourism.

Meanwhile, the Treasury paper says schemes such as the FSCS are underwritten by the UK government, which lent it £20 billion during the banking crisis of 2008.

The retail banking sector in an independent Scotland would be dominated by only two large banks – the Royal Bank of Scotland and the Bank of Scotland – with the costs for compensating the depositors falling on one bank if the other was to fail, the study will say. However, an independent Scotland would be required to set up its own deposit guarantee scheme rather than share existing UK schemes, the Treasury says.

Account holders in England with savings in Scottish banks under independence would not be protected by the FSCS, the authors of the report will say.

The paper, launched by Scottish Secretary Michael Moore in Edinburgh today, is the third in a series of reports assessing the impact of a Yes vote in 2014.

It says: “The UK government lent around £20bn to the FSCS during the recent financial crisis. Under European law, an independent Scottish state would not be able to ‘share’ the UK’s deposit guarantee scheme, such that it covered firms authorised in both Scotland and the continuing UK.

“The retail deposit market in a separate Scotland would be dominated by only two large banks (RBS and BoS) and, if one of these were to fail, the costs for compensating the depositors would fall almost entirely on the one remaining bank.”

It continues: “In an independent Scottish state, FSCS-eligible deposits held by Scottish firms (and which would therefore be covered by the Scottish compensation scheme) would be over 100 per cent of Scotland’s GDP, representing a significant contingent liability of the state – and a much more significant proportion than in the UK as a whole.

“As was clear from the 2008 financial crisis, where there are doubts about the ability of the sector to meet claims through the compensation scheme, it can be necessary for governments to step in to guarantee deposits in order to prevent deposit flight.”

However, Scottish finance secretary John Swinney insisted an independent Scotland would be wealthy enough to provide security for savings and pensions through its own scheme.

He said: “Assertions and claims about Scotland’s financial sector are entirely misleading – in terms of share of GDP, in fact, financial services are actually smaller for Scotland at 8.3 per cent than the UK at 9.6 per cent. So if the argument is about risk, then the risk is with the UK.

“Much of the Treasury paper also seems to be based on a flawed, outdated view of the world, which takes no account of the substantial banking reforms which have been ongoing across Europe since 2008.”

Ms Sturgeon, speaking ahead of the launch of the Scottish Government’s paper on independence, said she and Mr Salmond would tomorrow highlight economic strength.

She said: “Everyone knows we have a strong offshore oil and gas industry, but Scotland is so much more than that.

“Our food and drink sector is booming, with a turnover of £12bn last year, our manufacturing industry exported over £14bn worth of goods and in creative industries, life sciences, tourism and new areas like the low-carbon economy, our talent can deliver real success.”

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