EU Pensions directive retains cross-border solvency rules – ICAS analysis
Christine Scott, ICAS Assistant Director, Pensions, considers the EC's apparent U-turn on cross-border solvency rules and what this means for the independence referendum debate.
The publication of the revised EU pensions directive was received with an element of disappointment by both the pensions industry and pensions advisors. The solvency rules for cross-border defined benefit schemes, which had been rumoured to be on the way out, remain firmly in place. This reflects a difference of views between the European Commission and the industry on where the balance lies between protecting the interests of scheme members and other beneficiaries and the promotion of cross-border activity.
In the context of the referendum debate, the cross-border solvency rules remain a major headache for the sponsoring employers and pension trustees of UK defined benefit schemes (DB schemes) which would become cross-border in the event of Scottish independence. While it remains unclear how the Scottish Government could initiate discussions with the UK Government and the EC on the easement of these requirements for such schemes, the emergence of support for the removal of the cross-border solvency rules as part of a wider debate on EU pension regulation could ultimately sweep these rules away. However, as things stand any change is unlikely within the timescale proposed by the Scottish Government for Scotland to become independent following a 'Yes' vote.
Back in April 2013, ICAS published its paper Scotland's Pensions Future: What pensions arrangements would Scotland need? Perhaps the most significant issue we raised was the potential impact of the cross-border solvency rules on private sector DB schemes with members across the UK and their sponsoring employers.
Under EU law, DB schemes which operate in more than one EU state must be fully funded at all times. The creation of a border between Scotland and rUK following a 'Yes' vote would trigger these rules for DB schemes with members on either side of the new border which were operating a staged recovery plan.
Quantifying the number of DB schemes and the value of deficits which would need to be made good is not straightforward and continues to remain elusive. There has never been any need for regulators to gather information on schemes with members in Scotland and in rUK. However, it is possible to give a sense of the scale of pension deficits based on information published by the UK Pension Protection Fund.
Across the UK there are around 6,000 DB schemes sponsored by employers in the private sector. According to the PPF 7800 index about 3,700 of these schemes have a deficit relative to the compensation (i.e. pension benefits) the PPF would need to pay if the sponsoring employer became unable to support the scheme. The PPF pays compensation to the members and other beneficiaries at a lower level than DB schemes themselves would pay.
The aggregate deficit for all 6,000 plus schemes (i.e. taking into account those schemes which are in surplus) at the end of December 2013 on a PPF 7800 basis was £28 billion. However, this is a less onerous basis than the technical provisions basis which applies to the measurement scheme liabilities and the calculation of scheme surpluses or deficits for the purposes of actuarial valuations: this is also the basis relevant to the cross-border solvency rules.
It therefore follows that more than 3,700 schemes are in deficit on a technical provisions basis and that the aggregate deficit will also be higher. We estimate that the aggregate deficit on a technical provisions basis is £300 billion or more: this is a ballpark figure and its purpose is therefore only to illustrate that the numbers involved are very big. A proportion of this figure relates to the deficits of schemes which would become cross-border in the event of a 'Yes' vote and further analysis beyond this is difficult. However, we are keen to emphasise that is a matter of significance across the UK and would require the efforts of both the Scottish and UK Governments in conjunction with the EU to resolve.