Complexity to the power of Yes

The challenges of a ‘Yes’ vote for Scottish independence are for some pensions professionals entirely surmountable. Others see nothing but a big headache. John Lappin finds many unprepared to go on the record with a view either way

As with a lot of divorces, the potential separation of Scotland from the rest of the UK throws up a host of pension challenges.

Complexity is certainly what corporate advisers predict if Scotland votes ‘yes’ to independence in September’s referendum.

The latest poll by the Daily Record and Dundee University suggests 47.6 per cent would vote ‘No’ and 39.3 per cent ‘Yes’, with a crucial 13.1 per cent undecided.

If ‘Yes’ is the choice of the people of Scotland, corporate advisers will have to grapple with a host of issues surrounding tax, regulation, workplace pension reforms, DB liabilities, the age at which Scots might be able to receive the state pension and even, in extremis, what currency Scotland would use.

Most advisers say they are maintaining a watching brief for themselves and their clients, though there is also some reluctance to enter the debate fully – even on the practicalities.

One firm said: “Our partners are split and so are our clients so we are reluctant to speak officially”.

Others have been put off by the publicity attracted by Standard Life, which went public with a list of clarifications it wanted from the Yes camp on how pensions business would be transacted in future.

Though Standard asked for information regarding individual pensions, corporate advisers will want a little more about the company side of things.

In a paper, Pensions in an independent Scotland, released in September last year, the Scottish government gave notice of its intentions to set up Scottish institutions governing many aspects of pensions.

The most eye-catching policy for the Scottish public was the plan for the retirement age. While embracing UK wide plans for a rise in the retirement age to 66, the paper said the Government would reserve judgment beyond this age because Scotland has lower life expectancy.

What will also catch corporate advisers’ attention will be the approach to DC and DB pensions, especially if the latter are cross border.

The Scottish government believes that EU transitional arrangements will allow for three year’s grace on this issue of cross border DB schemes – as happened with UK and Ireland schemes when the directive came into force.

It would also seek to create a Scottish Nest. The report said: “A Scottish equivalent of the National Employment Savings Trust (Nest) should be established as soon as possible following independence. The Scottish Employment Savings Trust (Sest) would provide a workplace pension scheme focused on people with low to moderate earnings, which would accept any employer wishing to use it.”

The report has also suggested that it would be in the best interests of all parties to continue with the Pension Protection Fund, but in what the Scottish Nationalists may view as the Coalition being as unhelpful as ever, Treasury Chief Secretary and Lib Dem MP Danny Alexander has ruled this out.

Both the cross border arrangements and Sest have been questioned in the Scottish parliament. Gavin Brown MSP, the Conservative spokesman for finance and pensions has attacked a lack of clarity over how the proposed Scottish Employment Savings Trust would be funded and how auto-enrolment would work.

Iain Gray MSP, Labour’s finance spokesman has echoed those sentiments and voiced concerns about cross border pensions.

These politicians and indeed some Westminster MPs for Scotland have particularly seized on a series of questions raised by the Institute of Chartered Accountants in Scotland in two reports, though ICAS stresses it remains firmly neutral on the big question.

For example in a recent report ICAS said: “There remains no clear plan as to how the Scottish and UK Governments will engage with the EU on how to minimise the impact of the cross-border funding rules on defined benefit schemes carrying deficits, which become cross-border schemes, in the event of independence.”

Then again, as if to illustrate just how quickly the goal posts can change, recent indications from the EU suggest that the cross border directive’s requirement for schemes to be fully funded might be toned down. 

David Davidson, director at Spence and Partners in Edinburgh co-authored the two ICAS papers on Scottish independence and pensions. He says: “With the Scottish government and the rest of the UK, there is a commonality of interest in negotiations with Europe”.

But in terms of suggestions that rules could be eased, he adds: “Of course Scotland would need to be an EU state and even if the rules changed, they might not be in place prior to 2016. Can you advance apply the rules, or would existing rules stay in place? It is uncertain.”

Davidson adds: “Obviously in terms of auto-enrolment, to get Nest off the ground the Government has had to invest a lot of money to be paid back over a period of time. Nest is essentially a numbers game. If you are looking at a potential population of Sest of five odd million people as opposed to 60 odd million there is a question over what sort of terms you are going to get and whether the Scottish government is likely to benefit from the costs repaid by Nest as it starts to mature. That is one of the biggest questions in terms of the DC market.”

Rachel Holmes, a chartered accountant and pro independence Scottish university lecturer on finance, tax and pensions, says: “Just because there are details to be worked out for financial services, does that mean the whole of Scotland shouldn’t vote yes. Industry has always responded to demographic changes.

“The arguments on cost are interesting but, for example, why can’t we have a combined PPF, backed by the two Governments. These are not insurmountable problems. There are workarounds on all these issues. Some things may need to stay the same for the while. But the industry in Scotland will have a say in what happens. In terms of these downside risks, you can’t have clarity until the deal is done, but it doesn’t mean clarity will not be achieved. Industry has always responded to changes and I don’t think any government in Scotland is going to rip up and start from year zero.”

As these debates continue, corporate advisers are working out their approach.

Hargreaves Lansdown head of pensions research Tom McPhail says: “Looking at the Scottish Government plans, it is clear that investors North and South of the border could face some significant additional investment costs. Plans for separate regulation, compensation schemes and a Scottish National Employment Savings Trust would all incur set up costs running into hundreds of millions of pounds, assuming they are still using pounds; all this at a time when every effort is being made to reduce investment charges.

“There would be the additional administration costs placed on every financial institution across these islands as a result of having to create duplicate processes, training programmes and information systems to accommodate the two different national systems. If we end up with separate tax rates or a separate currency it would get even more complicated and costly. The cost of all these changes will inevitable fall on ordinary investors and will reduce their investment returns and retirement incomes.”

McPhail says he is writing to all business partners, insurance companies, fund managers and service companies in Scotland asking them to outline what their contingency plans are. “We need to get a sense of where everyone else and consider how we as a business deal with that on behalf of clients.”

In Scotland, most advisers have adopted what might be called a watching brief.

Dunfermline based adviser William George reflects that point of view. 

“I have corporate clients who back independence and those who don’t. We don’t even know how we will be regulated, so it is very difficult to advise clients. You can’t give specific advice in terms of currency or tax regime, though most clients haven’t asked any questions. They are running their own business on a day to day basis. There will be a lot of negotiations to come. We can’t plan yet, because if it does happen we don’t know what form it will take”, he says.

Glasgow based Advance Retirement Planning’s Ferrier Pryde says he believes it will all come down to tax for clients. He says: “The issue for my corporate clients, first and foremost, is tax. At the end of the day from a business perspective, I am interested in the tax for the employee and the company but the other powers are of no real interest to me”.

Pryde suggests that one thing to watch for would be a big Yes vote share. Even if it isn’t enough for independence it could influence how much extra power will be devolved, though he and his clients do not believe corporation tax powers would be devolved.

Other advisers do not want to be named on the issue, but say that many smaller corporate clients have indicated they are examining where their business is registered in case the tax situation begins to  diverge.

Syndaxi Financial Planning director Robert Reid also says that it is very early days to know what to tell clients what to do.

He says: “We advise both sides of the border. Until the SNP are more specific, it is hard to know what to do. Yet if Alex Salmond goes into detail too early, he is not going to keep the attention of the voting public.

“It is going to take years to sort all this. It could take five or six years just to do the split. There is an assumption by people that it is going to take five minutes.

“A lot depends on the tax, and you might be able to play a tax arbitrage. They will need to be a double taxation agreement, though look how long that took for somewhere as small of Malta.”

Interestingly, though if the turmoil did last six years, the approach of England based Richard Jacobs Pension and Trustee Services may ring a few alarm bells for Scottish providers. Jacobs says: “Standard Life have announced they may have to relocate. That will involve costs. In the auto-enrolment arena, we are tending to avoid Scottish based pension providers. It is brought into our planning process. If you have Aviva and Standard Life and they both offer to take a scheme, then we aren’t going to go with Standard Life. AE costs are going to be so tight, we don’t want that disruption.”