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Brexit - implications for private pensions

Published Wednesday, March 15, 2017

Looks at the emerging discussion about the potential implications of Brexit for EU pensions

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What is the legal framework?

The design of pension systems is largely the responsibility of Member States. The regulatory framework at EU level covers:

  • establishing an internal market for funded occupational pension schemes and the minimum standards to protect scheme members;
  • minimum guarantees concerning accrued rights in occupational pension schemes in case of the insolvency of the sponsoring employer; and
  • anti-discrimination rules. (European Commission Memo 10/302 Green Paper on Pensions and Green Paper. Towards adequate sustainable and safe European pension systems, July 2010, SEC(2010)830)

The Pension and Lifetime Savings Association (PLSA) explains that UK workplace pension schemes tend to operate on a national basis but want access to investment opportunities and service providers in the EU:

  1. Workplace pension schemes in the UK are not generally looking to provide pensions to workers in other Member States. So, in this respect, there is little interest in taking up the opportunities that might - in theory at least – be provided by an effective EU-wide Single Market.
  2. However, workplace pension schemes do want ready access to investment opportunities and service providers in EU and across the world, and this is where a strong Single Market has a role to play. Having ready access to the widest possible range of service providers helps schemes to invest their assets and administer their schemes with a minimum of cost in order to provide the best value to their members. (PLSA Response to balance of competences review: single market and free movement of capital, January 2013).

EU legislation has an impact on them:

  • directly, through pensions-specific EU legislation such as the Directive on Institutions for Occupational Retirement Provision (‘IORP Directive’), through the regulatory activities of EIOPA, and through EU employment law, such as the Equal Treatment Directive; and
  • indirectly, because the costs of complying with the EU’s investment markets legislation (such as EMIR, MIFID, the draft Money Market Funds Regulation and the potential Financial Transaction Tax) are passed to pension fund clients by asset managers, brokers and banks. (Ibid)

What will Brexit mean for this?

Following the vote on 23 June, the regulators said existing law would continue to apply until changed by the UK Government and Parliament (FCA Statement on European Union referendum result, 24 June 2016).

The PLSA said pension schemes do not want major regulatory upheaval:

UK pensions law is extensively intertwined with EU law, regualtions and court rulings. There is no need to dismantle this framework - and very little to gain from doing so. (PLSA, Brexit and Pension Schemes: Getting the right deal for Britain’s savers, January 2017).

It says that while they would welcome clarification on whether the revised IORP II Directive will apply, in the UK, of greater concern is the potential EU legislation on a solvency-based funding regime for pension schemes (Ibid).

There have been questions in the pension press about whether the Government will proceed with complex rules to require the equalisation of Guaranteed Minimum Pensions (GMPs). However, the PLSA argues that the UK's own Equality Act and continuing participation in the European Convention on Human Rights will prevent this outcome (Ibid). A new EU Directive on Data Protection Regulation is expected to apply in the UK (Occupational Pensions, September 2016).

What about market changes?

Following the vote to leave, the Pensions Regulator warned against "knee-jerk reactions" but said trustees should review their position to understand the risks in the scheme's investment strategy and employer covenant (their legal obligation and financial ability to support the scheme). (Market volatility following the EU referendum: guidance statement from TPR, July 2016).

The PLSA says that the most obvious immediate policy consequence of the referendum had been:

[...] the Bank of England's announcement of a 0.25% reduction in the base rate and further £60 bn of quantitative easing (QE) announced on 4 August. QE, in particular, has undoubtedly contributed to pension fund deficits. (PLSA, Brexit and Pension Schemes: Getting the right deal for Britain’s savers, January 2017).

Lane Clark and Peacock have looked at the impact on scheme's abilities to de-risk (LCP, Pension de-risking, September 2016 update).

What does the pensions industry want?

According to the PLSA, the UK has the larges pensions sector in Europe, providing pensions for 20 million people and with over £1 trillion of assets under management. It argues that a successful outcome from the Brexit negotiations would include the following:

  • For a strong economy: replication of both the current UK-EU framework for free trade in goods and existing EU free trade agreements with third countries. Also, a new immigration policy that continues to allow flows of talent and labour from the EU for the good of the wider economy in general and pension schemes in particular;
  • For the right regulation: the maximum possible access to the Single Market in services – while also exempting pension schemes that operate only in the UK from damaging EU pensions regulation, such as a potential solvency-based regime for pension funds;
  • For strong financial services: continuation of the passporting regime so that pension funds can invest efficiently. (PLSA, Brexit and Pension Schemes: Getting the right deal for Britain’s savers, January 2017).

The ABI has called on the Government to “make a clear commitment that it will seek an early agreement with our European partners on a high level transitional implementation period which will help avoid economic shocks to both the UK and the EU”. It has also set out ‘five key asks’ for UK insurers:

  • Securing a regulatory environment that is appropriate for the UK market.
  • Retaining the ability to passport out of and into the UK.
  • Closely mirroring the EU data protection regime to avoid a quagmire of complexity around how personal and non-personal data is protected.
  • An improved future migration policy that enables the employment of high-skilled professionals from both within and outside the EU. (ABI calls for ‘clear commitment’ to a transitional implementation period following Brexit, December 2016).


Commons Briefing papers CBP-7629

Author: Djuna Thurley

Topic: Pensions

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