The UK government has published the third in its series of Scotland analysis papers, intended to inform the debate on Scottish independence in advance of the September 2014 referendum. The paper covers Financial Services and Banking and examines the arrangements to protect consumers of financial products in the UK and in a future independent Scotland. The UK compensation schemes which protect pensions are the Pension Protection Fund and the Financial Services Compensation Scheme.
Pension Protection Fund (PPF)
The PPF protects members of eligible UK defined benefit (DB) pension schemes in the event of the scheme employer becoming insolvent. The PPF is funded by levies on eligible schemes. Under an independent Scotland, members of Scottish schemes would no longer be eligible for the PPF unless an agreement was reached to permit Scottish schemes to continue to be covered. If, as would be expected, Scotland was admitted to EU membership it would be required under the Insolvency Directive to put in place measures to protect DB benefits in occupational pension schemes. One way to do this would be through the creation of a compensation scheme similar to the PPF, although alternative methods could be considered.
The Treasury analysis argues that if a Scottish compensation scheme had a smaller number of eligible schemes (compared with the current PPF) this would lead to an increased concentration of risk, particularly if the employer of a large scheme was to fail. The solution to this issue would be for an independent Scotland to share the PPF with the remaining UK. This is possible under EU law (Luxembourg has such an arrangement with Germany) but would require the agreement of the UK government.
Financial Services Compensation Scheme (FSCS)
The FSCS is the UK’s investor compensation and deposit guarantee scheme. The FSCS currently protects life and pensions products, such as annuity contracts, in the event of the insurance company’s insolvency. The availability of FSCS compensation will therefore be an important consideration for pension scheme trustees purchasing a buy-in or buy-out policy from an insurer.
The Treasury’s view is that, in practice, a greater level of protection could be given to consumers of financial products, including pensions, under the current UK-wide arrangements than in an independent Scotland and a separate UK. The basis of the Treasury’s view is that a greater pooling of risk might be achieved in a larger market, particularly where the home state would have a larger GDP relative to the size of its protected bank deposits.
In the event that Scotland became an EU member state, EU law would require the establishment of arrangements to protect occupational pensions and FSCS-eligible investments and deposits. On that basis it would be expected that similar protection arrangements for pensions would be continued following independence for Scotland. The precise details of the compensation schemes which might be adopted by an independent Scotland will therefore be of interest to Scottish pension scheme members and policyholders of Scottish insurance companies. For the position of both the PPF and the FSCS it is likely that additional information will be issued (by both governments) as the independence debate continues.