Scottish defined benefit (DB) members would be at greater risk of losing part of their pension if an independent Scotland attempted to set up its own lifeboat fund, lawyers have warned.

With a vote on 18 September to decide on whether Scotland secedes from the UK, the potential level of protection offered to members in an independent Scotland has caused concerns.

The Pension Protection Fund (PPF) currently covers Scottish companies and members, with all schemes contributing through levies.

The Scottish government said an independent country would offer the same protection as the PPF to Scottish members, either through a cross-border arrangement with the existing fund, or through a new offering.

However, James Dean, partner at legal firm TLT, said there were indications a separate scheme would struggle to provide the same level of protection members currently experience.

“There is more spreading of risk with the current PPF because of the jurisdictions which are involved. There are more schemes,” he said.

The concerns would lie with the large financial institutions in Scotland being the main levy contributors to the fund.

However, in the event of insolvency, these funds could be too large for a Scottish PPF to manage, as well as it losing a significant source of levy income.

“If you limit the number of schemes, and base it on a few, large employers, and one falls over then the risk would be greater to members,” Dean said.

In a paper published last year - ‘Pensions in an Independent Scotland’ - the Scottish government proposed to “closely align” the regulatory system with that of the UK.

It said it would ensure schemes remain protected and Scottish PPF members continue to receive their pension.

It added the best interest for all parties was for Scottish schemes and members to remain covered by the existing PPF, but said it would establish an equivalent fund if necessary.

Dean said it is understood the UK government is not keen on cross-border arrangements, while any PPF-sharing would rely on Scotland continuing to use sterling as its currency, currently a point of contention between the supporters and opponents of independence.

Joanne Shepard, senior consultant at Towers Watson, said currency would be an issue despite continued participation remaining the simpler option over establishing a Scottish PPF.

Precedent for the sharing of lender of last resort for pension funds does currently exists between Germany and Luxembourg, namely through the Pensions-Sicherungs-Verein (PSV). However, the Luxembourg schemes are vehicles set up under German law.

“Both options are quite difficult and require quite a lot of thought,” she said.

She said the splitting of the current PPF to account for levy contributions from Scottish firms would be difficult to calculate, leading to the potential of prolonged litigation.

While levies contributed to the payment of pensions from the PPF, they were also used to support the creation of a surplus, allowing the fund to be self-sufficient by 2030.

The fund recently said there was a 90% probability it would reach its target, with Scottish contributors entitled to benefit from this.

“Past service pensions and levies already paid have never been split out in any shape of form,” Shepard said.

“A Scottish PPF would also need assets to initially cover pensions depending on how it expects to build up its portfolio,” she added.

However, Nick Griggs, partner at consultancy Barnett Waddingham, said the risks with a cross-border fund would be high.

The issue relates to Scotland promising to create its own regulator, albeit basing this on the current model.

The UK regulator’s objectives includes protecting the PPF from risk and from being over burdened.

Griggs said if a Scottish regulator took a more relaxed stance on DB funding, the risks to the PPF could increase.

“It would not seem fair,” he said.

“If you have two regulators, you would need two separate lifeboat funds.”

“I would have thought they would have to set up a Scottish PPF, which would take on some assets and the surplus to pre-fund itself.

“The liabilities would be complicated and I don’t know how that would be practical,” he added.