While Brexit will impact pensions law in the long term, there is likely to be little immediate effect on domestic pensions law. The present issue for pension schemes is more economic than legislative. We would expect to see a more gradual evolution of legislation over time rather than an instant change.
The continuing uncertainty in the aftermath of the referendum is likely to negatively affect the financial markets and to continue to do so. For occupational pension schemes, such market volatility would affect scheme funding.
Scheme funding: market volatility
Market volatility will prove a challenge for trustees and administrators of UK workplace pension schemes. The uncertain future is likely to continue 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.
Trustees of defined benefit schemes should be monitoring their funding position closely. Additionally, trustees should be reviewing their funding strategy to try to safeguard against the market volatility.
The financial impact of exiting the EU on the scheme’s sponsoring employer should also be considered, to determine the risk to the employer covenant. If a risk is identified, trustees may wish to seek additional security from the employer.
Pensions legislation: a gradual evolution
While a substantial amount of pension legislation derives either directly or indirectly from European legislation, this has mostly been enshrined in UK law. Consequently, we do not expect any sudden change to UK pensions law as it stands.
What will change, however, is that UK pensions legislation will no longer be required to be interpreted by reference to EU law or to be subject to the jurisdiction of the ECJ. This should give greater autonomy to UK legislators to re-frame UK pensions legislation in a post-EU context.
While it is not possible to predict post-Brexit policy, it has been suggested that we may see changes in relation to TUPE legislation and GMP equalisation. Legislators will 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
Leaving the EU and taking the UK out of the scope of the Institutions for Occupational Retirement Provision (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. However, such arrangements could be subject to different funding controls agreed between the UK Government and individual states.