Brexit: pension trustees need to stay on their toes

Topic:

Hot topic

Date published:

Monday, 20 June 2016

Author:

Kevin Clark

Despite the opinion polls, political battling and betting odds against Britain exiting the EU (Brexit) after the EU Referendum on Thursday, pension trustees should update their risk analysis in case Brexit ultimately happens.

What if we go?

As we have all heard countless times, Brexit would lead to the need to establish a new trade agreement with the EU. EU legislation (hold on, wouldn’t that be what we were trying to get away from?) prescribes a two year time limit on such an agreement but Canada have not achieved agreement yet after eight years of trying!

One key issue is what effect would this uncertainty have on the strength of the employer covenant? Will there be an adverse effect on the employer’s business if the result is to leave the EU? Any impact will unlikely to be noticed immediately but will need to be monitored carefully.

The UK has considerable EU rooted employment and pensions legislation, such as for equal treatment and scheme specific funding. If Brexit happened, would this legislation be retained? Would EU challenges to UK laws around survivor benefits and GMP equalisation be sustained? Would TUPE need tidying up? After all, ECJ judgements affect UK pension scheme provision.

What would the future for cross border schemes be for UK employers, which by their very nature need to be fully funded?

Whilst the expectation is that the Pension Protection Fund (PPF) and the Pensions Regulator (tPR) would be retained, would tPR’s powers to recover funds for schemes from employers in the EU be reduced?

In the short term, markets would react unfavourably to Brexit. UK equity values would most likely decrease (indeed, we have seen them slide a little in recent weeks); however, diversification of equities within pension scheme investments should immunise pension trustees from any short term volatility.

The bigger question is what will be the impact on UK gilt yields, which are a key driver for valuation assumptions?

What if we stay?

If we stay in EU, we know we can look forward to:

• New General Data Protection Regulations (GDPR) from 25 May 2018. This will change obligations on data processors and enhance rights for pension members, as well as introduce higher fines for non-compliance equivalent to 4% of turnover up to 20m Euros.
• IORP II Directive, which potentially changes the role of lay pension trustees and may include the introduction of things like psychometric testing.
• Proposed EIOPA standard balance sheet/financial risk assessment and more stringent measures on cross border pension schemes.

In reality, I expect we would look to follow the GDPR changes even if we do vote to leave, but may want to avoid the others.

I have struggled to find anyone who thought that Brexit would be good for clients with defined benefit (DB) pension schemes. The combination of DB deficits potentially widening due to lower gilt yields, turmoil in investment markets and the call for funding from employers waiting to see the outcome of trade deal negotiations is not exactly appealing. One thing we can be certain about is pension trustees will need to stay on their toes.

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