In case you missed it, the UK public have voted to leave the EU. After months of claim and counterclaim what will this actually mean for pension schemes? The honest answer is that we still don’t know.
In the short term it’s expected that there will be volatility in the markets until the details of the post-Brexit world become clearer. This will affect many schemes’ funding positions and possibly also trustees’ views on the strength of their employer covenant. Longer term predictions still vary wildly.
From an individual member perspective, the impact of market uncertainty is most likely to be felt by those in DC schemes, particularly those close to retirement. The majority of members’ fund values are likely to have fallen today whilst the impact on the cost of buying an annuity is still to be seen. It is possibly now more important than ever that members seek guidance when making their retirement decisions. Employers and trustees of DC schemes may wish to review their retirement procedures to ensure that appropriate support is being provided.
From a legal perspective, it will take at least 2 years for the process of withdrawing from the EU to be complete and until that time the UK will continue to be subject to EU law, but what then?
A large amount of legislation affecting pension schemes has its roots in EU law, for example equal treatment requirements and the scheme funding provisions in the Pensions Act 2004 – if you’d ever wondered where the term “technical provisions” came from, it was the EU’s IORP Directive. The Pension Protection Fund is also (at least in part) the UK’s response to its obligations under IORP. However, these provisions are now enshrined in UK law and so will continue to apply unless and until they are changed and we would not anticipate any radical changes, at least not in the immediate future.
Certainly issues like equal treatment are accepted principles and it is difficult to see there being political will or popular support for curbing existing protections. One potential positive of Brexit (as far as most of the pensions industry is concerned) is that proposals to require the equalisation of GMPs might be kicked into the long grass – the Government’s stance on this (contrary to the views of many lawyers) was that GMP equalisation was required under EU law.
On scheme funding we did, of course, have minimum statutory requirements long before IORP (though MFR itself has been discredited) and there is nothing to suggest that the current system of scheme funding under Part 3 of the Pensions Act 2004 would be replaced. But over time might there be more scope for flexibility within both the scheme funding and the PPF regimes to better cope with situations such as those currently being experienced by the British Steel and the BHS pension schemes among others? Of course “flexibility” in this context might be seen as a euphemism for watering down member protection and any steps in this direction should be taken with great caution.
Although any changes to the existing legislative framework for pension schemes are likely to be limited, further integration with any new EU requirements (for example, should Solvency II rear its head) is also unlikely, though it remains to be seen what (if any) conditions the UK will be required to agree to as part of any trade deals.