Brexit: what it could mean for pension schemes

United Kingdom

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

The immediate impact on pension schemes of the UK leaving the EU is likely to be a financial one, rather than any specific changes to the legal or regulatory regimes. Longer term, there are areas where the current UK legislation derives from EU law and could be subject to amendment or repeal. Some areas where changes might be made are set out in the table below. The extent of any possible changes could be limited by any post-Brexit deals with the EU which may require the maintenance of current provisions in some areas – for example, data protection or financial services.

The initial impacts are likely to be on markets and currency (and indeed these are already being seen because of the current uncertainty) which will have knock on effects on pension schemes.

Particular effects pension schemes could include:

  • Impact on the employer covenant (including guarantor strength) – this will depend on the nature of the employer's business as well as the general economic situation. Trustees should be actively monitoring the situation over the coming months, considering the trigger terms of any contingent assets they hold and seeking additional security where appropriate.
  • Investment risk – trustees should take advice on any specific investment risks in their scheme including the possible impact on hedging arrangements and their exposure to currency risk.
  • Investment suitability – trustees should be asking their investment advisers to consider whether the scheme's investments are sufficiently diversified for the volatile market.
Scheme funding The current technical provisions funding regime derives from the IORP Directive. There is unlikely to be any major change in the short or medium term but there would be scope for relaxing some of the more technical detail in future if desired.
Investment Some of the investment requirements (including limits on employer-related investments and the requirement to diversify) derive from IORP. There are unlikely to be major changes to the current requirements in the foreseeable future. Many of the rules governing the financial services industry more generally also derive from the EU - it is unlikely there will be major changes here as the UK industry will need to continue to comply in order to operate in the European market. Once the position is clearer, a review of specific investment documents may be advisable.
GMP equalisation The Government position that GMPs must be equalised is based on EU law. It may therefore be that this issue could disappear.
Equal treatment There are unlikely to be major changes here on policy grounds. There may be an opportunity to relax some of the age discrimination provisions in order to allow pension schemes to operate with more certainty and not have to rely on justification arguments.
TUPE transfers There will be scope for the Government to amend or relax the TUPE requirements and to give more clarity on Beckmann issues.
PPF The PPF was established to fulfil the UK's obligations under the EU Insolvency Directive. It is unlikely there will be any major changes to the PPF in the current climate.
Sex based annuity factors It is an EU requirement for annuity providers (but not occupational pension schemes) to use gender-neutral actuarial factors. There would be scope for this to change and for providers to revert to gender-based factors.
Data protection

It is likely that current data protection legislation will remain in place (as well as new requirements equivalent to those under the EU General Data Protection Directive) so that UK business can continue to transfer data to the EU.