Untangling the web of pensions

If you think Scottish independence will be tricky for politicians, spare a thought for pensioners


England and Scotland’s shared history means that many companies operate in both countries, making no distinction between where workers are located. Assuming an independent Scotland would be a member of the EU its relationship with the UK would be akin to that of any other state. New lines would have to be drawn and, for occupational pension schemes, this may not be easy.

It is likely Scotland would set up an equivalent to the Pension Protection Fund (PPF) to ensure it complies with the EU Insolvency Directive. The PPF pays compensation to members of underfunded defined benefit (DB) schemes whose sponsor goes bust. The Irish recently saw Waterford Crystal workers win the right to compensation of 50 per cent of their pre-insolvency rights. As around 17,500 people in Scotland are being paid compensation by the PPF, going it alone would be expensive and a huge hassle factor.

Given that the PPF is predicting it will be financially self-sufficient by 2030 operating some sort of sharing mechanism may prove attractive to Scotland after independence, perhaps following the lead of Luxembourg, which shares an arrangement with Germany. But this would need UK agreement just when they are smarting from a

Hassle factor for UK schemes: 2/10; hassle factor for Scots: 6/10.

Changing the relationship of England and Scotland will kick-start cross-border provisions. These inspire fear and loathing among pensions lawyers. Each UK occupational pension scheme with members in another member state must comply with the provisions. As well as registration requirements, a cross-border scheme must be “fully funded at all times”. This means that if Scotland becomes independent, all DB schemes with Scottish members will need to be fully funded on an ongoing basis. A scheme that is not cross-border can set its own time period for making good any deficit:

Hassle factor for UK schemes: 10/10; hassle factor for Scots: 2/10.

Pension schemes increasingly run sophisticated investment arrangements, including asset-backed funding structures – involving a wide range of assets, including real estate, loan notes and intra-group loan obligations. The main concern is that these structures are employer-related investment or ERI – which was prohibited post-Maxwell to ensure a separation between the pension scheme and sponsor

Asset-backed funding structures usually involve the use of a Scottish limited partnership (SLP) as it is accepted that this works for ERI purposes. Trustees and sponsors will hope for arrangements in existence at the time of independence to be grandfathered in, otherwise trustees could find themselves in breach of legislation. 

‘Change in law’ provisions are generally included in documentation on these structures, so trustees’ rights will depend on that, but it might also include implementation of an alternative structure, a new schedule of contributions or the unwrapping of SLP payments:

Hassle factor UK schemes: 8/10; hassle factor for Scots: 1/10 (not even their own government will care if a few Scottish partnership lawyers are short on hours).