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:
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