Suzanne Vaughan reports on the Scottish Independence debate hosted by the Institute and Faculty of Actuaries
On 18 September the Scottish electorate will vote on the question of independence for Scotland. If this Referendum results in a yes vote, Scotland will be expected to become an independent state from 24 March 2016, with implications not just for Scotland, but also across the rest of the UK.
There remain many uncertainties on how a yes vote would impact on UK wide financial institutions and pension funds. These include such fundamental factors as currency, membership of the European Union and tax and fiscal policy.
A capacity audience of over 400 individuals from across the financial services sector came together on 20 March at Edinburgh's prestigious venue, The Hub, to hear from a distinguished panel of speakers about 'The Implications of the Scottish Independence Referendum for Financial Services.'
The event, organised by the Institute and Faculty of Actuaries (IFoA) was introduced by Martin Potter, Leader of the Scottish Board. The event was one in a series of activities being undertaken by the IFoA's Scottish Board in relation to the debate on independence.
As well as recognising the increased interest from both clients and the general Scottish public for the referendum, Martin also highlighted the main reason that had driven the IFoA to arrange such an event, our Royal Charter.
As a professional body with a Royal Charter it is very much our duty to service the public interest. As a result, although we remain neutral on the outcome of the debate and believe that it is for the voters to decide, we wish to inform the debate where we can. Therein raising the necessary questions that need consideration within our specialist areas.
The event was chaired by Bill Jamieson, executive editor of The Scotsman and regular business commentator for BBC Scotland. The panel consisted of:
John Swinney MSP, Cabinet Secretary for Finance for the Scottish Government (For)
Liam McArthur MSP, Scottish Liberal Democrat for the Highlands and Islands (Against)
Rachel Homes, Chartered Account and Member of Business for Scotland (For)
Gregg McClymont MP, Shadow Pensions Minister (Against)
With Scotland facing its most profound question for 300 years, Bill Jamieson kicked off proceedings with a short commentary from both camps.
For: Scottish Independence
John Swinney and Rachel Homes recognised the role and significance of financial services in Scotland. Commenting that at the heart of the debate is how we can create better economic opportunity in Scotland. "When we are able to take decisions here in Scotland, based on the economic circumstances and conditions and opportunities that are right for the people of Scotland, we can deliver better opportunities and prospects for the people that live and work here and choose to make their business here." sighted Swinney. Holmes adding that the current "one size fits all policy for macro-economics" isn't the answer, more targeted solutions are required.
Against: Scottish Independence
For Liam McArthur and Gregg McClymont the message was clear, that we shouldn't lose sight of the backdrop in which Scotland has prospered over the years, as part of the strongest, most successful, economic union we have ever seen. "We are greater than the sum of our parts," stated McArthur.
Highlighting some facts, because after all we are actuaries, 8% of Scotland's GDP comes from the finance sector, 90% of IASs and 80% of mortgages sold by Scottish companies are to people in the rest of the UK. As a result, McArthur stressed the implications a change in currency would have on the market as highly significant.
Questions were then welcomed from the audience.
Would pensions be more or less affordable in an independent Scotland?
For Swinney and Homes, the message was that Scotland is just as capable of proving its own pensions. Swinney alluded to the fact that the proportion of tax revenue that is allocated to social protection (that includes pensions) is 42.3% in Scotland compared with 43% in the UK. As a result, there is no great difference between the two nations. They acknowledged that the issue for Scotland is the existence of a smaller working population, but argued that only emphasised the need to create more vibrant economic opportunity in Scotland to grow this base.
McClymont presented the benefits of shared volatility by staying together, pulling the risks. Whether Scotland votes for independence or not in September, McArthur was clear that there is a demographic challenge for Scotland in relation to its working population and serious challenges lie ahead under either scenario.
Would Scotland face double regulation within the finance sector?
Swinney and Homes reassured that double regulation would not cause issues as this would all be formed at a European level and smoothed out between the nations.
For McClymont and McAthur it would be self-defeating to have an additional layer of regulation that adds no value to the industry. Extracting the pensions industry from the rest of the UK will be a costly exercise. McClymont stressed that currency would be key to this outcome.
In a recent Financial Times article, Scotland was ranked third 'best off' region in the UK, behind London and the South East. Does that not mean Scotland is one of the biggest losers in the pulling and sharing resources argument?
Swinney recognised that many financial services headquarters have moved from Scotland to London, as a result moving the strategic control away from Scotland. Commenting that there is currently no evidence of this changing. The FT article can be seen to give the electorate the confidence to make the independence decision, as the analysis clearly shows Scotland has a strong platform for economic development.
McArthur agreed the pressing need to de-centralise activities for the benefit of Scotland. "There is something bigger than just a cost / benefit analysis at stake here" stated McClymont, arguing that the union of some 300 years was more than just financial.
Will Scotland keep the pound?
"Yes" was the one word answer from Swinney in slightly comical tones. When asked to expand, he added that it is in the interests of Scotland as well as the rest of the UK so as to maintain the level of cross boarder activity between the nations and avoid unnecessary transaction costs for businesses.
"Yes ..if we remain in the UK" retorted McClymont in equally comical tones, stressing the need for monetary union to be accompanied by fiscal and political union in order for it to be run successfully.
Whether independence is voted for our not, we could see different tax regimes, how likely is it that the income tax rate will differ, and how will insurers cope?
There is no inherent need for Scotland to change its tax rates as a result of independence, as set out in the Yes Scotland paper commented Swinney. However, regardless of the Referendum outcome, powers are expected to be enacted in 2016 to allow different tax systems in Scotland.
McClymont sympathised with the impact this changing tax rate would have on pension providers and financial organisations trying to operate the two tax relief systems across the whole of the UK. He was also clear that he wished to safe guard against tax competition, "I do not believe in tax competition on these islands".
At least one Scottish Insurance Company has come out against independence, saying they will move their headquarters south of the boarder. Is the price of potential flight of businesses worth paying?
Swinney and Homes commented that such companies are just doing their fiduciary duty, analysing all the risks they face. The reality was that this analysis tends to result in two or three lines in the Chairman's report, simply stating they continue to monitor the risk. For Swinney, people buy products from Scottish based insurers, not just because it comes from Scotland, but instead because of the relevant Company's track record.
McClymont was clear that the financial services in Scotland have benefitted greatly from a single market and single currency across the UK. McArthur agreed it was a "Legitimate concern" and agreed for the need to have further debate on such issues.
With time swiftly marching on it was time to close the evening's proceedings. The main arguments of the evening were clear, it was a battle between more localised decision-making and the benefit of pooling and sharing risks.
I was delighted that in closing proceedings Bill Jamieson applauded the IFoA for its fantastic work to date in educating the public in this important aspect of the debate. I for one was proud to see us engage with such a distinguished panel and move just one more step further along the path of meeting our public interest Royal Charter.