From the blog: The press is full of reports surrounding the transfer of defined benefit schemes to defined contribution or personal pensions. What has been massively overlooked is trustee responsibility to deferred members who are no longer UK residents.
The UK has a tradition of employing migrant workers not just from the EU, but globally. A large number of them return home after a period in the UK, either to retire or carry on with careers elsewhere with no intent to return – as residents – to the UK.
The UK has a tradition of employing migrant workers not just from the EU, but globally. A large number of them return home after a period in the UK, either to retire or carry on with careers elsewhere with no intent to return – as residents – to the UK. With the onset of Brexit, there may be an even larger number returning to the EU.
What are the options for deferred members of UK schemes?
Most will leave their deferred benefits in the UK until reaching retirement age, with the fund denominated in sterling. Most occupational schemes do not offer the facility for deferred members to select the currency of their underlying investment portfolio.
Some will transfer out to a qualified recognised overseas pension scheme, although with the new overseas transfer charge this is more complicated and certainly not available to all:
Americans cannot transfer to a US 401K or IRA.
Canadians cannot transfer to RPSs, nor Indians to Indian pension schemes.
Even within the EU, a number of jurisdictions are no longer on the published QROPS list.
Some might transfer to a UK self-invested personal pension or other personal pension arrangement, the majority of which are also denominated in sterling.
A cursory look at the currency markets over the past year or two will show how sterling has fared against other major international currencies.
GBP£/EUR€ | August 2015 | 1.43 | |
August 2017 | 1.10 | -23% | |
GBP£/US$ | August 2015 | 1.54 | |
August 2017 | 1.29 | -16% | |
GBP£/RupeeIRP | August 2015 | 105 | |
August 2017 | 83 | -21% | |
GBP£/CAN$ | August 2015 | 209 | |
August 2017 | 165 | -21% |
The enlightened currency traders among you will no doubt go back beyond two years and look at periods where sterling was strong and the benefit was the other way.
What we see, however, is that over the past two years, deferred members of UK pension schemes, with current and future financial liabilities not in sterling but in other currencies, have seen the purchasing power of their UK pension funds drop by on average 20 per cent through currency depreciation alone.
Pension scheme trustees should be looking to act in the best interest of their members. As such, the question is, should they be actively informing deferred members who are no longer UK residents of the options to transfer out:
either to a UK personal arrangement with a specialist provider who can invest and manage the pension assets in line with the member’s domestic currency exposure; or
to an overseas pension scheme that is ‘recognised’ by HMRC, thereby avoiding an unauthorised payment charge and the new overseas transfer charge.
The alternative, surely, is for trustees to manage the currency exposure for individual members within their schemes, something it would appear is not happening, and may prove overly onerous.
Bethell Codrington is global head of international pensions at corporate expansion support company TMF Group
