"When it comes to pensions, Scotland might be better off outside the EU," says Aries' Ian Neale as he considers Scotland's possible independence.
On Thursday 18 September this year residents in Scotland will vote to decide the question: "Should Scotland be an independent country?" Vigorous public debate has so far centred on the consequences of separating from the rest of the UK, but independence could mean more than that.
Although determined to be independent of the UK, the Scottish Government believes that membership of the EU is in the best interests of Scotland. It's their policy that an independent Scotland will continue as a member of the EU. Whether it can, or indeed should, deserves more consideration.
Some, including European Commission President Jose Manuel Barroso and UK Foreign Secretary William Hague, say a 'yes' vote would mean Scotland would have to apply for membership of the EU, which would require the consent of all 28 Member States.
When it comes to pensions, Scotland might be better off outside the EU. Defined benefit (DB) schemes in particular have been battered by European Directives, court cases and other interventions, which even now threaten catastrophe for the UK. Uniformists bent on forcing Solvency II upon us are currently re-grouping behind the 'Holistic Balance Sheet' banner.
The Institute of Chartered Accountants of Scotland (ICAS) has said that if Scotland votes for independence (and somehow remains within the EU), sponsors of under-funded DB schemes could face demands for a sudden and massive increase in scheme funding.
This is because the European IORP Directive says pension schemes that wish to accept contributions from an employer in another EU Member State ('cross-border' schemes) must be 'fully funded', which means having sufficient and appropriate assets to cover the liabilities. Actuarial valuations must be sought annually with any shortfall being rectified within 24 months of the effective date of a deficit valuation.
A cross-border scheme is one with either 'European members' or 'European survivors' who are entitled to benefits or have a right to future benefits under the scheme. Cross-border operation comes with a fearsome burden of bureaucracy. Such schemes must be authorised by The Pensions Regulator (TPR), in the first place to accept contributions in respect of European members.
Where the scheme receives contributions from a European employer, it must comply with the social and labour laws of the host EEA state. TPR is required to notify the scheme of any information regarding social and labour laws that it has received from any of its corresponding regulators in other EEA states.
The Scottish Government seems to think, in the face of clear evidence to the contrary, that cross-border operation is commonplace and will pose no serious problem. It thinks three years will be long enough for schemes forced to comply with the cross-border rules to become fully funded. This is widely regarded as impractical, given the ten or more years which TPR has agreed many UK employers should take to recover deficits.
Indeed, it is not merely infeasible but unnecessary. UK DB schemes are fundamentally different to the various systems of pension provision in other EU Member States. Sadly, this is regarded by EU bureaucrats as no justifiable impediment to their dream of a single EU-wide regulatory system.
Arguably the referendum is an opportunity for Scots to decide whether the benefits of EU membership outweigh the costs. For DB pensions in Scotland, true independence could prove a blessing.
Written by Ian Neale, director, Aries Pension & Insurance Systems Ltd
ian@ariespensions.co.uk
