30 May 2016

A vote to leave the EU in June’s referendum would have little immediate effect on UK pensions law. While an exit from the EU would affect pensions law in the long term, the result would likely be a more gradual evolution of legislation over time rather than an instant change.  

However, the impact on financial markets, with knock on consequences for scheme funding, is already being felt.

Scheme funding: market volatility

The immediate impact of the referendum concerns pension scheme funding. Market volatility, both in the lead up to the referendum and the aftermath, could prove a challenge for trustees and administrators of UK workplace pension schemes. The uncertain outcome of the referendum is likely to affect the value of the pound and equity markets. As a result, scheme investment performance could be detrimentally affected, leading to a deterioration in scheme funding in the short term.

Views as to whether a Brexit would be a good thing for pension schemes (as opposed to the economy as a whole) are divided. While market volatility is predicted to continue if an exit occurs, some commentators suggest that pension schemes could see some benefits – for example that there could be an increase in Government borrowing costs, which might mean that pension funding levels would improve (as increasing bond yields would result in a reduction in the value of the scheme’s liabilities).

Pensions legislation: a gradual evolution

Considering now the more gradual impact on legislation, while a substantial amount of pension legislation derives either directly or indirectly from European legislation, this has mostly been enshrined into UK law. Consequently, if a Brexit were to happen, there would be no sudden change to UK pensions law as it stands on the date of exit.

What would change, however, is that UK pensions legislation would no longer be required to be interpreted by reference to EU law or be subject to the jurisdiction of the ECJ. This would lead to greater autonomy for UK jurists to re-frame UK pensions legislation in a post-EU context.  

While it is not possible to predict potential post-Brexit policy, some commentators have suggested that the treatment of pensions on a TUPE transfer is an area that may be amended. Legislators would be free to introduce legislation tailored solely to the UK jurisdiction, rather than the supranational, one-size-fits-all approach of EU policy.

Cross-border pension schemes

The Institution for Occupational Retirement Provision (IORP) Directive permits pension funds to operate across the European single market. Such schemes are, however, subject to more stringent funding controls than those that operate only within a single member state. To protect scheme members, cross-border pension schemes must be fully funded at all times. UK funds participate in relatively few cross-border schemes, primarily concentrated on arrangements between the UK and the Republic of Ireland. Such arrangements require approval by the Pensions Regulator.

It may be argued that a Brexit, which would take the UK out of the scope of the IORP Directive, may make participation in cross-border funding arrangements with the UK more attractive. This could give schemes greater economy of scale, with the further benefit of not being subject to the IORP Directive’s funding controls. Instead, such arrangements would be subject to new funding controls agreed between the Government and individual states.

State pensions

A Brexit would impact on state pension provision for UK citizens living in other EU member states. Currently there exist specific rules that co-ordinate social security entitlements for workers moving within the EU (which also apply to the EEA countries and Switzerland). These rules allow, for instance, a pension accrued in one member state to be drawn in another. Also, a UK pensioner resident in another EEA country will currently receive an annual increase to his state pension. Elsewhere, the UK state pension is only uprated if there is a reciprocal social security agreement requiring this.

To co-ordinate social security entitlements for ex-pats following a Brexit would require the UK to broker reciprocal arrangements with individual states. The impact of a Brexit on state pensions would therefore be largely dependent on the UK’s relationship with individual states.