If Scotland became independent these would become cross-border schemes and would be subject to more onerous funding requirements under the European Union’s pensions directive.
Under EU law, as interpreted by UK legislation, such schemes have to fund their liabilities in full, so any underfunding would have to be rectified immediately.
They would also have to undertake annual actuarial valuations, rather than triennial, as they currently do, a change which would involve significantly increased regulatory burden and expense.
The aggregate deficit of the 6316 DB schemes in the Pension Protection Fund’s 7800 index was estimated to be £236.6bn at the end of March 2013, with 5080 schemes in deficit.
It is not clear how many of these schemes would be considered cross-border schemes as a result of a ‘yes’ vote.
However, as things stand, schemes across the UK would in the case of a ‘yes’ vote face sudden, enormous funding requirements. There would likely to be serious cash-flow implications for employers.
The Icas report called for more information from the UK and Scottish governments about how they would seek to mitigate the impact of cross-border rules, and what advice they would give to businesses to enable them to plan for any structural pension scheme changes that may be necessary.
The situation is further complicated by an EU consultation to impose Solvency II funding requirements on DB schemes.
These rules would increase the funds’ deficits to £450bn, according to preliminary figures submitted to the EU’s pensions authority by The Pensions Regulator.
The central issue to be considered in relation to the state pension is how entitlements built up before independence would be dealt with.
The amounts involved are extremely large: in 2011 alone the UK state pension bill was £82bn.
The Icas report called on the UK and Scottish governments to outline how they plan to deal with the entitlements built up. Would a future, independent Scotland be responsible for this entitlement for Scottish citizens?
If this were to be the case, what amounts, if any, would the UK government contribute to the Scottish government towards these costs? What would be the practicalities of this arrangement?
It should be possible to estimate the historic entitlement of Scots built up prior to any independence date and this would be vital to the Scottish government’s ability to assess its tax and borrowing requirements.