At the time of going to press, politicians continue to wrangle over how (and even if) the UK should leave the European Union. Meanwhile 29 March 2019 (Exit Day) looms unnervingly close and the potential pensions implications of Brexit need to be considered.
In this update we look at some of the issues that will be pertinent with effect from Exit Day if the UK leaves the EU without a 'deal'. However, even if Parliament agrees a deal (and this is then enacted in time), most of the same issues will still need considering, although there would be likely to be some breathing space in which to do so (in the form of a 'transitional period').
Employer covenant, funding and investment considerations
Since the referendum, the attention of pension scheme sponsors and trustees has largely been pointed towards the employer covenant, funding and investment implications for their schemes. Indeed, the Pensions Regulator issued a statement back in July 2016 highlighting example funding and investment issues that should be addressed. The Regulator reinforced its message in a more recent statement published in January and has included further guidance in its 2019 annual funding statement on its expectations regarding managing risk in respect of defined benefit schemes. Whilst funding and investment issues are critically important, in its January statement the Regulator also suggested some other areas that schemes should be focussing on, including:
- effectively communicating with members regarding Brexit concerns (especially where there may be worries regarding the payment of benefits if members live in another EU country) and
- action needed urgently if schemes engage in cross-border activity (given the UK cross-border legislation is due to be repealed on Exit Day).
In the remainder of this update, we will consider some of the other, perhaps less high profile, issues arising from Brexit that could affect pension schemes and so will likely require attention.
How might pensions contracts be affected?
Contracts held by trustees or employers that relate to the pension scheme should be reviewed to check if there are any unintended or unwanted Brexit consequences. Where any party involved has links to the EU (for example, through its company structure or the subcontracting of work), the risk of Brexit contractual issues is higher. There are particular concerns where the contract is with an EU-based provider of financial services, as clarity will be needed as to whether they will retain 'passporting rights' to continue to provide the service in the UK in the long term.
Issues to consider in the review include:
- whether the contract can be varied or terminated should Brexit related consequences render it unattractive
- are references to EU bodies and institutions still relevant and should references to specific EU legislation in the contract be frozen as EU law stands immediately before Exit Day or should they continue to track post-Brexit developing EU law?
- where a party to the contract is based in the EU, will enforcement of the contract become more difficult as a result of Brexit?
The final point will also be relevant where trustees have the benefit of a guarantee, or other similar commitment, from an EU-based entity.
Will scheme rules need amending?
Whilst a substantial amount of pensions legislation derives either directly or indirectly from EU legislation, this is already mostly enshrined into UK law. Therefore, there will be no sudden material change to UK pensions law as it currently stands when the UK exits the EU. This was the message given by the Regulator in its January statement mentioned above “we do not expect the UK’s departure from the European Union to have a significant effect in respect of the legislative basis under which schemes operate or trustees' ability to continue to administer the scheme effectively".
However, it has been necessary to make some legislative changes to ensure that existing legislation will still make sense and legislative 'gaps' will be minimised in the event of a no deal Brexit. The European Union (Withdrawal) Act 2018 takes a snapshot of most EU law as it applies in the UK immediately before Exit Day and brings that law within the UK's domestic legal framework. Regulations have been made under the Act (and more may follow) to tweak this pensions EU-derived law ('fossilised' as at Exit Day) so that it is relevant post Brexit. For example, there are numerous references in pensions legislation to the EU and EEA, to EU bodies and institutions and to European legislation (for example the IORP directive). Such references have to be amended as they would not make sense in a world where the UK is no longer part of the EU.
Further to these legislative changes, trustees should review their scheme rules to identify whether they contain any provisions which do not reflect UK pensions legislation as it stands post Brexit (together with references to EU bodies and organisations). At best, such contrary provisions will no longer make sense, at worst they may fail to comply with legislative requirements. As schemes will need to be administered correctly pending amendment, there will be the increased possibility of error and member confusion the longer this task is left.
As pension scheme documentation is usually bespoke, it should be checked thoroughly as there could be unexpected Brexit consequences which might be avoided by amending the documentation.
Data protection issues
In the manner explained above, the European Union (Withdrawal) Act 2018 ensures that the General Data Protection Regulations 2018 are fully absorbed into UK law at Exit Day. This means that there will not be any major changes to the way in which data is protected in the UK. However, in the event of the UK leaving the EU without a deal, the UK will become a 'third country' for data protection purposes.
Although the UK Government has stated that it will permit data to continue to flow from the UK to EEA countries post Brexit, this sentiment has not been reciprocated by the EU. The UK will need to seek an 'adequacy decision' from the EU in order to be able to receive personal data from EU countries without having to take additional data protection measures. Even though the UK is currently fully compliant with EU data protection law, it still may take some time to negotiate an adequacy decision. Therefore, trustees and sponsoring employers who receive personal data from other EU countries will need to make alternative arrangements to ensure the continued flow of that data. There are various means of doing this, for example, by adopting standard contractual clauses approved previously by the European Commission (although an added complication is that these alternative arrangements would not necessarily allow the UK to transfer the data involved on to another third country).
Trustees and sponsoring employers will need to check their data protection processes and documentation to determine whether they require amendment to ensure the continued flow of personal data should there be a 'no deal' Brexit.
For more information…
You can visit our Brexit hub for more information about the progress of Brexit and its implications. We will continue to monitor developments. If you need advice on how to deal with any of the issues raised in this article, or with any other issues arising from Brexit that may affect your pension scheme, please get in touch with your usual pensions contact.