The Brexit vote – What to do?
21 / 07 / 2016
Wherever you sit on BREXIT – whether as scheme sponsors or trustees – in the current turmoil well informed decisions are key. The Court expects employers and trustees to take decisions in context, but what is the context and how does Brexit affect schemes?
Context for decisions
Understand the timescale for Brexit. Some pointers:
- Legally we are still in the EU and subject to EU law.
- The referendum result does not oblige the UK to give notice under Article 50.
- We remain in the EU until such time as the UK gives notice under Article 50 of the EU Treaty to leave the EU and then actually leaves. The maximum notice period under Article 50 is two years unless the UK and the European Council both agree to extend the period.
- Constitutional – there are both international and domestic constitutional aspects. International because our membership of the EU is by Treaty. Joining or leaving a Treaty is achieved by exercise of Royal Prerogative powers by the Prime Minister in the name of the Sovereign. This is tantamount to a decision of the Sovereign, having been properly advised by ministers. At the UK domestic level, Parliamentary approval to repeal the 1972 European Communities Act 1972 will also be needed.
In mainland EU there are also constitutional issues in terms of the parties to be involved in exit negotiations and approval of proposed exit terms.
- With the present political turmoil both here and in mainland EU there seems little prospect of any Article 50 notice until at least Autumn 2016 and perhaps much later. Some suggest we may not exit the EU until 2019.
Many EU states want the UK to serve its Article 50 notice as soon as possible. Many UK MPs consider giving notice should occur only once terms have been agreed so that the notice and terms go hand in hand. From the legal perspective this seems logical. Nobody likes giving notice unless the commercial (and not just the legal) consequences of giving notice are clear.
Conclusion – the timescale for leaving the EU is wholly uncertain.
How does leaving the EU affect pension schemes?
1. Pension law:
Most of the relevant EU law is reflected in English domestic law and therefore, if and when we leave the EU, this law will remain in place until any change is enacted. Some areas of pensions law derived from EU Law were identified in our article “Should I stay or should I go now“.
Much of EU Source UK Pensions Law is sensible and at most should need minor adjustment. Broadly speaking the following areas spring to mind in this category:
|Topic||UK Law||EU Source|
|Sex discrimination, part timer claims and age discrimination||Equality Act 2010 and Regulations||(Original) Article 119 Treaty of Rome
Equal Treatment Framework Directive
|Scheme Funding||Pensions Act 2004 and Regulations||EU IORP Directive|
|Data Protection||Data Protection Act 1998||The European General Data Protection Regulation has recently been published and is due to effect across the EU from 25 May 2018 – equivalent new UK law may well be needed.|
Other areas of UK Law are presently less satisfactory due to the impact of EU law. For instance, in relation to pension rights where employees who are members of an occupational pension scheme are transferred from seller to buyer on a business transfer. The UK’s Transfer of Undertakings Protection Regulations apply (TUPE) in such circumstances. The underlying EU Acquired Rights Directive mean some additional special types of pension rights transfer under TUPE. This area would benefit from reform if and when the UK has a free hand.
Some further thoughts:
- Transfers from UK registered schemes to qualifying recognised overseas pension schemes (QROPS) or to qualifying non-UK pension schemes (QNUPS) – We doubt whether exiting the EU will impact the UK legislation in these areas but this remains to be seen; and
- VAT Directives – The impact of leaving the EU on HMRC’s present approach to supplies of services to pension schemes by third parties and HMRC’S proposed rules re tripartite contract between employers, trustees and suppliers. It may be Brexit will lead to HMRC extending the transitional period due to expire on 31 December 2016 and to postponing its proposed tripartite contract rules.
2. Commercial impact on sponsors of defined benefit pension schemes
In contrast to Brexit’s impact on pensions law, the impact on business of the Brexit vote may be significant and hence must be considered by scheme trustees and their covenant advisers in assessing the employer’s covenant. The impact will vary from business to business and may take time to become clear.
Longer term, schemes with EU (but non-UK) sponsors or guarantors will on the UK’s exit from the EU be more removed from the reach of UK Trustee boards and from the UK Pensions Regulator. The present EU law on enforcement of cross border debts (eg a pension debt under section 75, Pensions Act 1995) and the EU insolvency framework (under the EU Insolvency Regulation) will cease to be available, leaving parties to operate less user friendly cross border mechanisms.
3. Scheme Investments
Scheme assets will in most cases be immediately impacted positively or negatively by the Brexit vote. The overall economic forecast has also changed e.g. the long term prospects for inflation (up?) and interest rates (down?).
Trustee boards should ensure they obtain appropriate professional advice as to possible/recommended steps. Seismic events such as the Brexit vote at least require trustees to take stock in the interests of prudency and to record this in risk registers, even if it is too early to make changes.
4. Scheme Accounting
Possible easing of accounting rules – the government’s response to the economic shock of Brexit (eg more quantitative easing) may have the adverse effect of increasing the value of schemes’ pension liabilities. Accordingly the Pensions Minister has stated that the government is considering how pension schemes account for their liabilities, so that the stimulating effect of post Brexit measures is not undermined.