Scottish independence: Pension warning for SNP

A study by the Institute of Chartered Accountants of Scotland (Icas) questioned the affordability of private pensions, suggesting a Yes vote could leave companies facing massive costs and potentially being put out of business.

It also highlighted the cost of paying for Scotland’s share of the United Kingdom’s £893 billion public-sector pension schemes and £82bn state pension.

Icas said a Scottish Pension Protection Fund should be established to secure people’s retirement plans in the event of independence.

Opposition politicians claimed the report was another blow to First Minister Alex Salmond’s independence argument and warned companies could be put at risk if they had to finance the pensions “black hole”.

According to Icas, splitting up the UK would have far-reaching implications for private-sector pensions due to European Union law.

Its report states that pension schemes operating between Scotland and the rest of the UK after independence would be classified as “cross-border” under EU law.

Writing in The Scotsman today, ICAS executive director David Wood said the re-classification of so-called defined benefits schemes would have “major cash-flow implications” for employers.

Many private pension schemes are under-funded, as contributions from staff and employers have been insufficient to pay for pensions. That has been worsened by the economic conditions, which have cut pension investment returns.

Businesses are trying to claw back the deficit in their pension pots through staged recovery plans, designed to fill the gap gradually over several years.

Under EU solvency law, however, cross-border pensions have to be fully funded at all times, meaning the missing cash would have to be found immediately after independence.

The report fails to come up with a precise figure for the potential cost of fully funding cross-border schemes. But the latest figures from the UK-wide Pension Protection Fund shows there are 5,080 schemes running a deficit, which comes to a total of £265.4bn.

It is unclear how many of those are run by companies with employees in England and Scotland, so it is difficult to come to an exact figure.

However, Mr Wood said that, looking at the size of the deficit, it could be “quite a few billion”.

He went on: “The Icas paper raises questions about the protection and solvency arrangements which an independent Scotland would need.

“For schemes in the private sector, which became cross-border schemes in the event of independence, addressing any underfunding would be a priority for both Scottish and rest of UK employers.”

The report also looked at public-sector pensions, pointing out Scotland’s ageing population was growing older faster than elsewhere in the UK.

At the moment, the figure for unfunded public-sector pension liabilities is £893bn, a huge sum met by the taxpayer on an on-going basis and representing 37 per cent of all UK liabilities.

Given it is such a large figure, the negotiations determining how much of that total would be met by an independent Scotland would prove crucial. Mr Wood said a 1 per cent swing either way in Scotland’s share would amount to an £8.9bn change.

Under devolution, Scotland – with more than 500,000 public-sector workers – has unfunded public-sector pension liabilities of £60bn, and a funded public-sector pension liability – schemes underpinned by assets and investments – of £26bn, mainly accounted for by the local government pension scheme.

The report warned these liabilities could increase substantially if Scotland took responsibility for its share of UK schemes, such civil service, armed forces, judiciary and quango pensions.

Icas noted that in 2010-11, state pensions of £74bn and pension credits of £8bn had been paid out – representing 40 per cent of social benefit payments and 13 per cent of all UK expenditure.

It suggested agreement would needed as to which government would be responsible for Scots’ state pension entitlements built up prior to independence.

The report also referred to the question of currency in an independent Scotland. It made the point that if Scotland had a different currency to the rest of the UK, the pensions of Scottish-based workers employed by companies south of the Border would be subject to exchange-rate fluctuations – which could work for or against them.

Shadow pensions minister Gregg McClymont pointed to the leaked draft Cabinet paper from finance secretary John Swinney that acknowledged spending on the state pension would have to rise in Scotland after independence.

The Labour MP said: “Privately, John Swinney admits the current state pension may be unaffordable, while publicly stating that they will make it more generous. This report makes clear that the SNP have no answers to key pensions questions and people should be rightly worried.

“The requirement of cross-border schemes to be fully funded has not been addressed. Yet again, the SNP haven’t done their homework. Scots simply don’t know what will happen to their pensions if the SNP break up Britain.”

A Scottish Government spokeswoman said: “Pensions will continue to be paid in an independent Scotland as they are now.

“The Scottish Government is already responsible for the majority of public-sector pensions and independence will provide more fiscal levers to enhance affordability and sustainability. All pensions rights and entitlements which have been accrued will continue to be fully protected and accessible with independence, including private, public and state pensions.”

She added: “The cross-border management of pensions is commonplace throughout the EU. There is no reason why similar arrangements cannot be put in place for an independent Scotland.”

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