The Treasury has warned the creation of an independent Scotland would cause “significant disruption” to the UK pensions market, with the associated costs likely to be borne by savers.
In September 2014 a referendum will be held which will decide whether Scotland should remain as part of the UK or leave and become an independent state.
The Treasury has today published an analysis of the impact Scottish independence would have on UK financial services.
The analysis suggests the cost of providing pensions could rocket as insurers are forced to develop new products to address any changes in tax system or pension policy.
It says providers will also lose the economies of scale benefits of providing products across the UK.
The Treasury says: “Attempts at EU level to create a single market in pensions have so far not succeeded, as a result of substantial differences between member states in the areas of tax, labour law and social security.
“If an independent Scotland and the UK were to diverge in these areas, it would cause significant disruption to the pensions market.
“If Scotland were to become an independent state, pension providers would have to ensure that their products address the change in tax systems and any differences that develop in pension policy.
“Scottish independence would require pension and life insurance products to be fit for purpose for either the continuing UK market or the independent Scottish market. This could involve significant structural and organisational changes for firms that would come at a cost that firms could choose to pass on to consumers.”
The Treasury says the uncertainty associated with these changes would have a “harmful effect” on the pensions sector.
The report says: “Customers deciding which firms to use for their long-term savings and investments products, including pensions, put a high value on trust and certainty.
“Prolonged uncertainty could have a harmful effect on the sector, and represent a serious source of concern to customers.”
The Treasury also analyses the potential impact Scottish independence would have on defined-benefit pension schemes.
It says: “Significant issues would be created for occupational private pensions schemes if Scotland were to become independent from the UK.
“Currently, employers are able to run defined benefit and hybrid pension schemes UK wide. However, if Scotland were to leave the UK, schemes that are provided from Scotland to the rest of the UK and vice versa would become cross-border.
“An independent Scotland as a separate EU member state would create substantial additional burdens for any schemes that would become cross-border.”
In addition, the Treasury says an independent Scotland would be required to create its own Pension Protection Fund to guarantee the benefits of DB members if a scheme sponsor goes bust.
It warns this would result in a high concentration of DB risk north of the border because there are relatively fewer DB providers.