The Scottish and UK Governments have been called to engage with the pensions industry to minimise the financial impact that Scottish Independence could have on private sector schemes.

A report, published by professional chartered accountants body ICAS, stated that if Scotland votes 'yes' for independence in the referendum, then under European Union (EU) law, pension schemes operating between Scotland and the remainder of the UK would be classed as 'cross-border'.

EU solvency requirements would then have major cost and cash flow implications for employers with cross-border defined benefit (DB) and hybrid schemes as pension liabilities would have to be fully funded at all times, underfunding would have to be rectified immediately and annual actuarial evaluations would be necessary.

David Wood, ICAS executive director, technical policy, said: "This 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 the UK employers."

The report suggests that the Government of any future Scotland should continue with existing UK arrangements for pension regulation in the early years of independence, and a separate Scottish Pension Protection Fund would need to be established.

An agreement would also need to be reached to decide which Government would be responsible for the state pension entitlements of Scots built up prior to independence in the events of a 'yes' vote.

Responsibility for the UK's public sector pension liabilities would also need to be established.

Liabilities of £86bn have already been identified as relating to Scotland, including £60bn which are unfunded, but there are UK-wide public sector pension schemes where Scotland's share would need to be determined as part of Scotland's 'opening balance sheet'.

Wood said: "ICAS calls on the Scottish and UK Governments to engage with business, the pensions industry and the EU to minimise the financial impact on these schemes, their sponsoring employers and the people who have paid into the schemes.

"Both Governments have a duty to engage with citizens and other pensions stakeholders to prepare a way forward, in advance of the referendum, and agree transitional arrangements to be implemented in case of a 'yes' vote."

First published 26.04.2013

monique_simpson@wilmington.co.uk