An independent Scotland would have to build a completely new pension system, taking on potentially huge costs, the U.K.'s Department for Work and Pensions warned Thursday.
In the run-up to a September referendum, which will decide whether Scotland should become independent of the rest of the U.K., the DWP has released an extensive report looking at the challenges a stand-alone Scotland would face.
They are twofold, according to the report: the need to create the basic infrastructure to administer pensions effectively and safely — both state and public service pensions; and the need to also secure the sustainability and affordability of future pension promises.
“The government of an independent Scottish state would need to provide early assurance that it can deliver pensions in line with savers' expectations, possibly by raising taxes or cutting other public services,” the DWP wrote.
Separating from the rest of the U.K. would mean Scotland would have to spend time and money on protecting and regulating pensions, supporting automatic enrollment, and would have to “disentangle U.K. state pensions from those of an independent Scottish state.” The current Scottish government has indicated that it would “seek to mirror the U.K.'s reforms on workplace pensions and carry forward automatic enrollment in an independent Scottish state,” according to the report.
The Scottish government would also have to deal with liabilities across Scottish public service pension funds — taking on a proportion of liabilities that stand at about £100 billion ($167.9 billion).
Scotland would have to set up its own Pensions Regulator, at great cost. The U.K.'s Pensions Regulator has a budget of £66.6 million for fiscal year 2014 alone.
Another big issue would be an independent Scotland's loss of access to the U.K.'s lifeboat pension fund, the Pension Protection Fund, which takes on the payment to members of defined benefit plans in the event of an employer's insolvency. The PPF charges a levy to the large number of DB funds that fall under the PPF, but an independent Scotland would have to set up its own arrangements.