But pension scheme demergers are going to happen

What to do about pension schemes which operate across Scotland and the rest of the United Kingdom? That is just one of the questions which will need to be resolved in the event of a “Yes” vote in the Scottish independence referendum on Thursday. It will be an issue for both sponsors and trustees of occupational pension scheme sponsors whether based in Scotland or elsewhere in the UK if Scotland becomes an independent EU member state. 

Schemes operating on both sides of the border would become subject to the cross border scheme requirements under EU legislation meaning a more stringent statutory funding obligation would apply and they would be subject to extra regulatory oversight. The alternative would be to end the cross-border nature of the scheme. Not necessarily an easy course of action, but one way forward would be a demerger of the scheme to separate out the assets and liabilities of the Scottish and other beneficiaries into two separate arrangements. Any demerger would, in all likelihood, involve detailed negotiations between the sponsor employers and the scheme’s trustees before the trustees could reach a position in which they feel they could properly agree. Even so, I have no doubt that many of estimated 3,000 potentially affected schemes will go down that route if the Scots vote “Yes”.

New cross border issues may soon be leading some employers to voluntarily propose pension scheme demergers but for others it is likely to become close to a legal requirement. The Financial Services (Banking Reform) Act 2013 seeks to ‘ring-fence’ the deposits of individuals and small businesses, separating everyday banking activities from investment banking. Recognising that group-wide pension liabilities could undermine the efficacy of that ring-fencing, the Act allows the Government to require the ring-fenced banks to ensure that they cannot become liable for the pension schemes liabilities of the rest of their group. Easier said than done! The Government is currently consulting (the consultation ends on 15 October 2014) on a set of Regulations which prescribe the outcome required but not the method by which it is to be reached. In many cases the only solution will be some form of pension demerger. Again, detailed negotiations between trustees and sponsor will be needed. But in this scenario reaching a mutually acceptable conclusion could be harder because the whole purpose of the exercise is to remove some assets from the effective covenant of the scheme! The trick, presumably, will be to find a way to divide liabilities so as to mirror the divide in the assets and covenants. Interestingly the risk of stalemate has been addressed by giving the power for an application to be made to a court to intervene in the event that trustees or an employer other than the ring-fenced bank unreasonably refuse to co-operate.

So while it may be impossible to call the result of the Scottish referendum, I would happily put money on there being a material increase in the number of pension scheme de-mergers over the next few years, even though some of those break ups may not be easy to achieve.