BlackRock Warns on Scottish Independence

Terry Flanagan

BlackRock has warned pension fund sponsors and trustees that they need to immediately start scenario planning for Scottish independence.

Voters in Scotland are due to vote for independence from the United Kingdom on 18 September.

BlackRock said in a report that Scottish pension schemes or schemes with contributors in both Scotland and the rest of the UK are now regulated by the Pensions Regulator and contribute to the Pension Protection Fund. An independent Scotland wants to establish its own regulator and protection scheme but would continue to pay into the existing UK Pension Protection Fund as a transitional arrangement.

The report said: “How would two regulators, two countries and a single pension protection plan work in practice? Would the remaining UK regulator be prepared to take on regulation in a country where it is not part of formal government?”

The fund manager said it expects scheme sponsors would want clarity operational issues such as records transfers but further risks are European Union regulators.

For example, the EU IORP directive requires schemes operating in more than one country to fund liabilities in full immediately rather than implementing a recovery plan over time and the the Scottish Government has indicated it would seek a grace period in any EU negotiations. However BlackRock warned that the suggested three-year grace period is much shorter than the typical UK time span.

EU cross-border schemes are also required to have annual actuarial valuations, rather than a valuation every three years in the UK.

“Sponsors and trustees likely would consider setting up separate remaining UK and Scottish schemes – despite the costs and complexities involved,” BlackRock added. “We would advise them to start scenario planning today, given the time lags in splitting existing schemes.”

BlackRock also said that a currency union between an independent Scotland with the UK looks infeasible Scotland entering the eurozone does not appear to be a near-term option.

The report said: “The best of the (few) choices: Scotland launches its own currency, perhaps linked to the currencies of its main trading partners (sterling would feature prominently) and the price of oil.”

In the gilt market Blackrock said the reminder UK is likely to shoulder legal responsibility for all gilts issued up to the point of formal separation.

The report said: “We do not see increased risk for UK debt holders other than in the (presumably) remote case that Scotland defaulted on this liability.”

BlackRock also expects gilt-edged securities, UK government bonds, to sell at higher yields as an independent Scotland would have to pay more to borrow than the UK and also accept shorter maturities.

The fund manager said credit investors will also factor the volatility of oil and gas prices into gilt yields, in particular if there are increases in populist spending programmes.

“North Sea revenues are volatile as they depend on energy prices, production volumes, costs and tax incentives,” added BlackRock. “Fiscal spending based on specific oil revenue projections is uncertain and probably unwise.”

Blair McDougall, director of the pro-union Better Together Campaign, said in a statement:“The report by Blackrock is a serious piece of work from experts in managing money. The Scottish National Party cannot dismiss this as they have every other warning from experts, employers and economists.

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