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Brexit - implications for private pensions

Published Tuesday, December 4, 2018

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, 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’) that have been transposed into UK law; 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 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).

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 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.

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).

Some potential areas of impact...

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. Draft regulations paid before Parliament as part of the Government's planning for the eventuality of the UK leaving the EU without a withdrawal agreement in place include provision for cross-border schemes to operate across borders post-Brexit (Explanatory memorandum, para 7.5-7.7).

There are a range of provisions across many different pieces 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. These arrangements allow pension schemes that access pooled funds to do so by purchasing EU-domiciled funds (Luxembourg and Ireland mostly) where the management of those funds is delegated back to the UK, and UK-based fund managers to do the day-to-day management. In addition, there are provisions that allow firms to provide services across the rest of the EU, provided that their relevant domestic regulations have been deemed equivalent to those of the EU. These issues are discussed in Library Briefing Paper CBP 8454 The Political Declaration on the Framework for Future EU-UK Relations (November 2018), section 4.6 and CBP-8397 What if there’s no Brexit deal? (p70-2).




Commons Briefing papers CBP-7629

Author: Djuna Thurley

Topic: Pensions

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