PLANNING FOR YOUR/OUR PENSION FUTURES?
By Christine Scott, Assistant Director - Pensions, ICAS
Pensions has emerged as one of the most fiercely debated topics pre-referendum along with the more overarching issues of currency and membership of the European Union (EU). Perhaps this is not surprising as security in retirement matters to us all. Planning for retirement should ideally start when we enter the workplace, though evidence suggests it rarely does. Saving towards a pension is a long-term endeavour and the closer we are to retirement the less able we are to affect the level of retirement income we will have.
Therefore, the challenge for the Scottish Government is to demonstrate that an independent Scotland is better placed to deliver a pensions’ system which meets the needs of Scottish citizens while ensuring that in the event of independence citizens would at least be no worse off in retirement.
This challenge is apparent in the Scottish Government’s report Pensions in an independent Scotland. The Scottish Government’s plan to establish an independent commission to examine the timetable for increasing the state pension age to 67 is a clear example of a policy area where power would shift on independence and decisions would be made based on Scottish and not UK circumstances. This aspect of the paper is in contrast to the plans for the regulation of private pensions where the Scottish Government is largely focused on how an independent Scotland would establish a system for the regulation of private pensions which would be structurally similar to the current UK system, including sharing the Pension Protection Fund (PPF). By seeking to maintain the pan-UK regulation of private pensions, the Scottish Government’s intention appears to be the preservation of a pan-UK (or single) market for pensions.
……..the challenge for the Scottish Government is to demonstrate that an independent Scotland is better placed to deliver a pensions’ system which meets the needs of Scottish citizens
The European Insurance and Occupational Pension Authority (EIOPA) is looking to revise the Directive citing the low number of cross-border schemes as one of the reasons. However, it is unlikely that EIOPA will seek to reduce the solvency requirements placed on all private sector defined benefit pension schemes, although plans to tighten the solvency rules were deferred earlier this year.
Cross-border regulation is facilitated by requiring schemes operating across borders to be authorised by the pensions regulator in their home state only while applying tighter solvency requirements: cross-border schemes are not permitted to operate with a deficit. In order to maintain a pan-UK market for pensions, post-Scottish independence, newly cross-border schemes would need to be fully funded or separated into two. Alternatively, an exemption or extended grace period for such affected schemes could be sought through agreement, but that would require the assent of all 28 EU member states.
The cross-border rules have been a hot topic since ICAS highlighted the issue back in April in its publication Scotland’s Pensions Future: What Pensions Arrangements would Scotland Need? The Scottish Government now acknowledges the importance of this issue and the need to engage with the European Commission (EC) and the UK Government on possible solutions.
At the moment, where a defined benefit scheme operates in the UK only, a sponsoring employer can pay down a scheme deficit over a number of years. A ‘recovery plan’ is agreed with the pension scheme trustees and must be approved by The Pensions Regulator (TPR). Recovery plans can extend beyond fifteen years and are generally reviewed every three years following a scheme’s triennial actuarial valuation. UK based cross-border schemes are not permitted to operate a recovery plan.
There are 6,000 plus defined benefit schemes operating in the UK. Latest available estimates indicate that these schemes are underfunded to somewhere in the region of £300 billion: this figure emerged during EIOPA’s consultation on the tightening of solvency rules.
The number of schemes which would become cross-border in the event of Scottish independence has not been established therefore the extent of any underfunding which would need to be rectified is difficult to estimate, nevertheless the figure would clearly be significant. Interestingly, the majority of defined benefit schemes in the UK are not based in Scotland, making this is as much an issue for the UK Government (and for pension scheme members outside Scotland) as it is for Scotland.
…. the majority of defined benefit schemes in the UK are not based in Scotland, making this is as much an issue for the UK Government
The Scottish Government’s paper refers to the grace period available to cross-border schemes based in the Republic of Ireland (ROI). The ROI has adopted a less strict interpretation of the Pensions Directive than the UK. ROI schemes wishing to operate cross-border are permitted a standard three year period to rectify any underfunding, with its Pensions Board agreeing a shorter or longer period on a case by case basis.
However, the Scottish Government recognises that a limited grace period would not be sufficient to tackle current levels of underfunding and its preferred solution would be an open-ended exemption from the cross-border solvency rules. A permanent exemption would likely come with strings attached. Therefore, arrangements for private sector pensions in Scotland and the remainder of the UK post-independence would need to remain closely in step quite far into the future.
Maintaining a pan-UK market for private sector pensions post-independence would be a complex and costly process. The agreement of the UK Government would be needed on a number of matters such as sharing the PPF. Also, if a negotiated solution on an exemption from the Pensions Directive cannot be agreed there would be significant financial challenges for employers and pension trustees to tackle if businesses and schemes were to continue to operate.
N.B> ICAS is participating in the independence debate from a public interest perspective and does not have a position on the outcome of the referendum.
Further reading can be found at:
Scottish Affairs Select Committee uncorrected transcript of oral evidence, 13 May 2013, The Referendum on Separation for Scotland: www.publications.parliament.uk/pa/cm201314/cmselect/cmscotaf/uc140-i/uc14001.htm
NAPF News, issue 4, 2013 “The Scottish Question and Pensions” (See attached PDF)
Christine Scott is Assistant Director, Pensions with ICAS (the Institute of Chartered Accountants, Scotland)
By Christine Scott, Assistant Director - Pensions, ICAS
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