Looks at the emerging discussion about the potential implications of Brexit for EU pensionsJump to full report >>
The design of pension systems is largely the responsibility of Member States. The regulatory framework at EU level covers:
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:
EU legislation has an impact on them:
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 need a strong economy, the right regulation and strong financial services. They did not want major regulatory upheaval:
UK pensions law is extensively intertwined with EU law, regulations 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).
However, it would be important to protect them from any EU legislation on a solvency-based funding regime for pension schemes that might be introduced in the longer term (Ibid).
The ABI has set out 'five key asks' for UK insurers: securing an appropriate regulatory environment; retaining the ability to passport out of and into the UK; closely mirroring the EU data protection regime; an improved future migration policy that enables the employment of high-skilled professionals from both within and outside the EU; a strong focus on regulatory dialogue and interantional agreements on financial services markets (ABI press release, 12 December 2016).
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 has produced a Brexit to-do-list for trustees, setting out ten actions to ensure their scheme is well-placed to deal with Brexit, including reviewing the employer covenant funding status and investment strategy.
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:
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:
Financial services across borders - there are a range of provisions across many different piececs of EU financial regulation which allow firms in Member States to provide financial services across the EU under a common set of rules and a single authorisation from their regulator (these are often referred to as 'financial services passports'). When the UK leaves the EU, those relying on a passport, which at that point falls away, may be in breach of local law. There are a range of possible solutions to those ranging from leaving firms to sort it out themselves, to mutually agreed and enacted solutions. The UK Government has committed, if necessary, to legislating for a 'temporary permissions' regime to allow EEA companies to continue to service insurance policies held by customers in the UK. It says there is a legitimate interest in mutual co-operation arrangements that recognise the interconnectedness of markets (The United Kingdom’s exit from and new partnership with the European Union, CM 9417, February 2017, para 8.26; Bank of England Financial Stability Report, June 2018, p8-9))
Cross-border occupational pension schemes - Cross-border occupational pension schemes (i.e. schemes located in one Member State that have members working and contributing in another) are subject to particular requirements under the first European Occupational Pensions Directive (IORP). This required them to be 'fully funded' at all times. Although IORP II - due to be transposed into UK law by January 2019 - effectively removes this requirement, there is still a risk of increased regulatory compexity. (PLSA, January 2017). There are very few cross-border schemes in the EEA but a significant proportion operate between the UK and Ireland (of the 83 cross-border schemes operating across the EEA, Ireland is the home country for 26 and the UK for 19). Post-Brexit, the UK will need arrangements in place to enable schemes to continue to operate across borders.
Commons Briefing papers CBP-7629
Author: Djuna Thurley