Brexit: is parting sweet or sorrow for pensions?

Assuming that Brexit does take place (without re-imposing EU terms), and a second Scottish independence referendum does not take place first, some changes to pensions law and the operation of pension schemes may well come to pass.

The decision on 23 June, though, does not mean that the basic landscape and structure of pensions law in the UK will either disappear or have to be dismantled on Brexit. The majority of EU law on pensions is contained in directives and so has been incorporated into UK legislation, such as the Pensions Act 2004 and the Equality Act 2010. Other more recent additions to the UK pensions law framework, such as the auto-enrolment regime and the 2015 pension freedoms for those aged 55 and over, do not originate from Europe.

So, subject to those caveats, what could change? Some changes could take place fairly soon, while more structural ones are likely to take some time and be linked to the outcome of developments in trade negotiations, hopefully taking notice of the pensions advisory industry to promote an integrated pensions law framework.

Possible downside

Earlier changes will depend on economic conditions and market confidence; negative trends could lead to, for example:

• Closer scrutiny of employers sponsoring pension schemes, in particular changes in their financial strength increasing the risk of their ability to fund pension schemes deteriorating. Factors that trustees, members and the Pension Regulator will be looking at will include dependency on imports, exposure to dollar-based costs, exposure to currency risk, likely movement of headquarters and/or trading operations outside the UK, dependency on customers and markets that are or are likely to be adversely affected, and no Brexit clauses in contracts. Weakening employer covenants lead to increased pension costs for business.
• Investment return volatility coupled with further lowering of gilt yields: this would see funding levels in pension schemes dropping, leading to increased pension contribution requirements.
• On state pension annual increases, the Government revisiting or even unlocking the “triple lock” of the higher of prices, average earnings or 2.5% being a real possibility, notwithstanding the powerful pensioner lobby.
• The Government also deciding that the heavily trailed reduction in tax relief for pension contributions, which ultimately was not included in the last budget, should be revisited.
• Review of the timetable for increased pension contributions under the auto-enrolment regime.

Silver lining?

Likely to come later, a number of EU requirements that have caused problems for UK pensions will cease to apply, which should lead to positive consequences, with the UK being able to change legislation and develop the law to be better aligned to our specific requirements. These include:

• Potential capital or solvency requirements under the IORP Directive (2003/41/EC) for defined benefit pension schemes in the UK at a much higher level than currently applies in the UK. Although the draft IORP II Directive does not include capital requirements, the EU could resurrect this in the future.
• Removal of the requirement for full funding for cross-border pension schemes, also under the IORP Directive. Many employers with overseas employees have avoided having such schemes for that reason, leading to additional complication and cost in having multiple arrangements. This could go some way to assisting businesses operating overseas post-Brexit.
• The Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246). The anomalies in the treatment of different types of pension benefits have been complicating business transfers for years.
• The conundrum that is equalisation of guaranteed minimum pensions (GMPs). State pension ages can be unequal, but not those in occupational pension schemes, which can be used to provide GMPs in place of that part of state pensions. The Government has indicated that GMPs should be equalised separately from the total pension benefits in those schemes. However, there has been no legislation to that effect, nor setting out how this should be done.

So, Brexit looks likely to cause sorrow but also, it is to be hoped, some sweetness as European law will no longer apply and our pension rules and requirements can be better aligned to our specific needs rather than a wider European standard. However, the terms of trade agreements reached will also impact on future pension law changes.

The UK will, though, retain and can develop its risk and regulatory frameworks, which hopefully will not make it more complicated or expensive for UK businesses to operate overseas or for citizens saving for retirement and accessing pension benefits.