Pensions Update: Brexit Stage Left for Pensions?
04 September 2018
In an orderly and well planned Brexit one would imagine that careful consideration would be given to possible effects Brexit will have on pensions. As we voyage through a chaotic and unplanned Brexit the opposite is true – no consideration has been given to how Brexit will effect pensions in the UK and further afield. This position may be changing.
The UK has the largest pension sector in the EU with over £1 trillion of assets, which provide capital flow to the British economy as well as to those of other EU Member States. Therefore a hard Brexit could have significant, European wide, ramifications for pension schemes.
The majority of these schemes are domestic, although there are a number of cross border schemes. Approximately 75% of these cross border arrangements operate between the UK and Ireland. EU legislation impacts these arrangements directly, through specific legislation and indirectly, via the cost of complying with investment legislation.
A recent briefing paper composed by the House of Commons Library examined the implications that Brexit could have on private pensions in the UK and across Europe. It outlines the legal framework in which private pensions operate and highlights the potential effects Brexit will have on that framework. The paper examines the best case scenario post Brexit and identifies potential areas of impact which will be affected once the UK leaves the European Union.
Interestingly the briefing paper indicates that most of the existing UK legislation will continue to apply until the British government decides to change it, so this in turn may mean we do not see an immediate impact on pensions once the UK leaves the EU.
Post Brexit requirements
The Pensions and Lifetime Savings Association have indicated that they are keen to retain access to investment opportunities and service providers across the EU. Having access to these services allows schemes to invest in assets without incurring higher costs which means a higher return for pensioners.
The UK will be doing their utmost to retain their “financial services passports”. There are a number of different pieces of EU legislation which allow Member States to provide financial services across the EU which are known as passports. Having such a passport enables a pension scheme to access a pooled fund by purchasing an EU domiciled fund while allowing the management of the fund to be retained in the UK. When the UK leaves the EU it could result in the loss of such passports and breaches of various financial regulations may ensue. This loss could also prohibit a UK occupational pension scheme from investing in funds based in Ireland, which may have a significant impact on the Irish economy given the significant level of assets in these funds.
The Financial Conduct Authority has stated the approach that should be taken between the UK and EU is to have mutually agreed solutions enacted on a consistent basis. Andrew Bailey the FCA’s chief executive highlighted that leaving this problem to be solved by individual firms will result in high costs, risks and uncertainty. A joint commitment by political authorities, as well as some form of transition period is needed to find a practical solution.
Cross border occupational pension schemes
A cross border scheme is a scheme which is located in one Member State that has members working and contributing in another Member State. These schemes are subject to particular requirements under the first European Occupational Pensions Directive (IORP).
This Directive has stringent funding requirements, one being that the scheme must be fully funded at all times. A new Directive (IORP II) which is due to be transposed in January 2019 will remove this requirement; however there will still remain a risk of regulatory complexity for schemes which operate across borders.
There are 19 Cross Border IORPS that list the UK as their “home” member states. What will happen to these schemes is open to debate but it is unlikely that they will be able to continue to operate on a cross border basis following Brexit. These schemes may need to be unwound or re-domiciled. Either of these options presents a considerable amount of regulatory red tape.
It is difficult to predict with certainty the precise impact Brexit will have on private pensions in the UK and the knock on affects across the EU.
In the immediate aftermath it is possible that investment volatility will occur which may pose risks to all pension schemes. However these risks may be minimised by allowing UK pension schemes to have some form of passporting ability into countries such as Ireland where many funds are located. In relation to cross border schemes arrangements will need to be put in place between the UK and other Member States to ensure their continued operation. Where this is not possible consideration needs to be given to how they can be spilt or re-domiciled.
It is interesting that the Irish Pensions Authority has started writing to the trustees of Irish cross border schemes enquiring as to whether they have considered the implications of a “hard Brexit” on their scheme and what contingency plans they have in place to implement in April 2019 to keep the scheme operational. The Pensions Authority has requested responses by August 2018 although it is difficult to see the Authority getting responses of any substance considering the lack of clarity that exists in how Brexit will actually come to pass.
The content of this article is provided for information purposes only and does not constitute legal or other advice.