Much has been written about the financial implications of a ‘yes’ vote on Scottish independence. However, no aspect of financial planning is more important than the impact of a ‘yes’ vote on pensions. As the deadline approaches, uncertainty abounds, with one side seemingly keeping their fingers crossed that everything will be alright, and the other predicting a doomsday scenario. As ever, the real answers can be found somewhere in the middle, and the answer to each individual’s concerns depends on their personal circumstances.
Under EU rules on ‘cross-border pensions’, schemes are not allowed to carry deficits and must be fully funded at all times. As such, companies with employees on both sides of the Scotland / England border would either have to split their schemes into Scottish and ‘the rest of the UK’ in terms of their administration, or failing this, the scheme would be considered as being ‘cross-border’ and would therefore have to comply with EU regulations in terms of being ‘fully funded’. My feeling is that most Scottish insurance companies will ‘brass-plate’ UK offices to avoid the funding regulations, however this will not come without costs. These costs will ultimately be borne by members, which can only mean one or both of the following outcomes taking place:
- scheme costs rise
- and/or benefits are reduced
Whatever happens on the 18th September, unfunded pensions have been and will continue to be a big problem. One can only ‘kick the can’ down the road so far; at some point in time measures have to be introduced to solve the general issue of unfunded pensions. The independence vote could be a great opportunity (excuse) for insurance companies to reduce benefits and/or increase costs. Market traders are always looking for reasons to take profits; note the recent drop in Sterling on the tenuous news of a ’yes’ result. By the same token, corporations and pension providers are constantly on the lookout for ways of reducing pension liabilities.
Another potential issue that Scots will be faced with, is that a new Scottish government will inevitably have to create their own version of the Pensions Protection Fund from scratch. This can only be funded through general taxation; as such questions will arise about the level of personal taxation that Scots will have to bear. So far we have heard very little about potential future tax rates, and quite a lot indeed on spending promises. This expenditure will of course have to be paid for through capital and income taxation. Pension providers will be required to pay into the newly formed protection fund, which means that plan-holders will invariably end up footing the bill. One possible up-side would be the potential for greater pension tax relief as a result of higher than expected income tax rates; however these costs will ultimately have to be paid for by the general population.
The use of QROPS as a possible solution
It seems pretty certain therefore that pension benefits will be reduced and costs will rise, but are there any opportunities presented by this new scenario?
The route to real pension independence could be through Qualifying Recognised Overseas Pension Schemes (QROPS). If a pension provider decides not to split operations, members in one country with a pension in the other, would potentially be able to transfer to a QROPS and therein avoid the uncertainty of rising costs and reduced benefits. Similarly, if the Scottish currency issue remains unclear, a member of a scheme who lives in ‘the rest of UK’ but whose pension provider is ‘offshore’ in Scotland, could transfer to a Sterling-based QROPS in order to completely eradicate any currency risk. This also would apply to EU expats, who should be wary about having a pension plan in either country as they would be exposed to currency risk, unless they opt to transfer to a Euro-based plan such as a QROPS.
For holders of personal pension plans many of the issues will be similar; more costs leading to lower benefits. For expats the currency issue alone should be enough motivation to transfer to a QROPS whatever the outcome of the Scottish independence vote.
Phil Loughton (Axis Strategy Consultants)