Crystal ball-gazing on Brexit is complicated by a febrile political environment, writes Walker Morris' Ruth Bamforth, but in most scenarios regulation of pension schemes is likely to remain on the same course.
Only time will tell on many of these questions. However, from what we know now there are a few observations that can be made about the impact of Brexit on pensions.
It is now fewer than 100 days until Brexit and the political uncertainty continues. Against that backdrop, crystal ball-gazing is difficult
Pension scheme design is the responsibility of each EU member state. However, the bloc’s own regulatory framework covers:
the establishment of a single market for funded occupational pension schemes and the setting of minimum standards to protect members, including scheme funding (the ‘IORP’ directive);
minimum guarantees for accrued occupational pension scheme benefits on the insolvency of the sponsoring employer, which led to the introduction of the Pension Protection Fund (the Insolvency Directive); and
anti-discrimination and employment protection laws (the Equal Treatment Directive and the Acquired Rights Directive).
UK pension schemes have trillions in assets to be invested in investment markets across the world, including the EU. This means that whatever the Brexit outcome, pension schemes must also comply with the EU investment market requirements.
Where are we now
The European Union (Withdrawal) Act 2018 received royal assent in June 2018. It addresses the ‘no deal’ scenario under which there is no withdrawal agreement and transitional arrangement.
The act takes a snapshot of all EU law on March 28 2019 and incorporates it into UK law. This means that, from a legal perspective, there will be no immediate change to the law post Brexit unless the government makes regulations pursuant to the Withdrawal Act.
However, some such changes are on the horizon. The Department for Work and Pensions has published draft regulations due to come into force on 29 March 2019 to deal with some of the pensions consequences of a no deal Brexit.
It will come as no surprise, therefore, that the onerous EU regime for cross-border pension schemes will be repealed. The small number of such schemes will no longer be required to be fully funded on the scheme funding basis at all times.
The Pensions Regulator will provide guidance to the affected schemes. It is worth noting that cross-border schemes will still be subject to the requirement that they must not discriminate against non-UK members.
Trustees may also take comfort from the fact that the draft investment regulations have been amended to confirm that trustees of occupational pensions schemes can still invest in UK and EU-regulated markets.
The original version of the draft regulations only included a reference to trustees investing in UK and not EU regulated markets. The undesired consequence of that would have been that trustees would have needed to divest from investments in markets outside the UK.
Looking further into the future
It is now fewer than 100 days until Brexit and the political uncertainty continues. Against that backdrop, crystal ball-gazing is difficult.
On the assumption that Brexit happens, the immediate way forward will depend on whether or not there is a deal.
If there is a deal and the UK enters a transitional period on March 29, nothing much will change – the UK will have to abide by EU law until the end of the transitional period. After that we shall need to wait and see.
If there is no deal, it is unlikely that there will be wholesale changes to pensions law. The PPF and the scheme funding requirements, for example, may have derived from the IORP directive but they are seen as important protections for members.
However, from a practical perspective, Brexit's possible effect on the UK economy may end up having the most immediate impact on the UK's pension schemes.
Ruth Bamforth is director at law firm Walker Morris
