Pensions insight
Brexit and UK pension schemes
Stuart Earle, pension partner at Eversheds LLP, analyses and discusses the impact of the referendum result
T he result of the European Union vote in favour of the United Kingdom (UK) leaving the EU. Since that time a great deal of speculation has taken place over what this means for the future of the UK and the impact on the economy. The pensions industry has not been immune to this. Although it will be some time before the terms of the UK’s future relationship with the EU are known, there are things that pension schemes and sponsors can consider and plan for now, and changes they can start to make, to help protect their interests. What are the implications? In the short term, Brexit is unlikely to have a significant impact on the legal and regulatory framework for UK pension schemes. However, it does open the door for UK legislation to deviate from EU requirements in the future (for example, in relation to funding, investment and scheme governance). Furthermore, without the influence of the European Courts, UK case law on matters which were previously the preserve of the EU, such as equal treatment and protection of employment where there is a transfer of an undertaking, may start to take its own domestic direction. Any continued political fallout from the EU referendum could also have a major impact on the future shape and direction of UK pensions policy. It is possible that the UK will probably choose to formally distance itself from certain EU originated policies which never fitted very well with the UK pensions system, including solvency funding requirements and guaranteed minimum pension (GMP) equalisation. For example, the Institutions for Occupational Retirement Provision (IORP) II Directive, (EU) membership referendum was announced on 24 June 2016, with a
communications, is now very unlikely to be enacted into UK legislation. In the more immediate future, there is likely to be considerable investment volatility and uncertainty. This could present both risks and opportunities for pension scheme trustees and corporate sponsors. The position will need to be monitored carefully, and trustees will need to consider quickly whether their scheme’s investment portfolio remains appropriate for a post- Brexit world. Scheme investments governed by the laws of another member state or contingent assets (such as parent company guarantees) based in the EU will also need particularly close attention to ensure they remain appropriate and enforceable. ...both risks and opportunities for pension scheme trustees and corporate sponsors The macro-economic impact of Brexit and its impact on individual businesses is difficult to predict with certainty as it is likely to be determined, to a large extent, by the nature of the UK’s ongoing relationship with the EU as well as any trade deals that the UK enters into with countries outside of the EU (such as the US and China). Trustees of defined benefit pension schemes need to be alive to any deterioration in the financial strength of the business standing behind their plan and corporate sponsors need to be prepared to address trustees’ concerns in this regard. In this respect, The Pensions Regulator has stated, “Our key message to trustees and sponsors of occupational schemes is to remain vigilant and review their circumstances, but continue to take a
considered approach to action with a focus on the longer term…” Immediate actions for corporate sponsors and trustees The most pressing action points for corporate pension scheme sponsors and trustees as a result of the EU referendum are likely to be as follows. ● Corporate sponsors should assess the potential impact of Brexit on their business and on their pension scheme and prepare contingency plans accordingly. They should also be ready to provide reassurance to the trustees of their scheme particularly as regards the covenant backing the scheme. ● Trustees should consider the suitability of their post-Brexit investment portfolio and what steps they can take to mitigate the impact of continued volatility on investment markets on their scheme. They should also reassess the strength of the financial covenant standing behind their scheme in light of Brexit, and should take steps to mitigate the risk of any material weakening. Scheme assets (including contingent assets) linked or subject to the jurisdiction of another EU member state should be reviewed closely. ● Trustees and corporate sponsors should consider the need to send communications to scheme members to reassure them about the steps that they are taking to mitigate any risks to the scheme arising as a result of Brexit. This could particularly assist members of defined contribution schemes where there will be an increased need to focus on their own investment decisions. It was always going to be an interesting time for pensions. The uncertainties of Brexit have compounded this further. n
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Issue 23 | September 2016
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