The United Kingdom's (UK) unprecedented vote to leave the European Union in June has led, amongst other things, to significant turmoil in global markets, warnings of an impending recession, and a multitude of power struggles in the halls of Parliament – the likes of which would not look out of place in a Shakespeare play. With all of the uncertainty and drama which has followed the vote to leave the EU, the UK is forced to continue to ponder what twists and turns the Brexit story might take next.
It is in the face of such unsettled times that the trustees of occupational pension schemes must continue to fulfil their duties to scheme members. Is it 'business as usual'?If not, what do trustees need to think about? Here are a few items to consider.
The Regulator's Statement
The Pensions Regulator (TPR) has published a statement advising that trustees and sponsoring employers remain vigilant and continue to focus on long-term outcomes for their schemes, rather than having a 'knee-jerk' reaction to the current market volatility.
Looking at TPR's comments regarding Defined Benefit (DB) schemes, it noted that trustees and employers should focus on three main issues:
- Covenant issues: TPR recognises the potential destabilising effect on employers of the post-Brexit transition period, although that effect will be sector-specific and, even within each sector, employer-specific. Trustees should consider how exposed their sponsoring employer will be to the risks and opportunities flowing from Brexit, and use that to inform their analysis of the employer covenant.An open discussion should take place between the trustees and the employer to allow the employer to share its views.
- Investment and funding volatility: Trustees should avoid being overly focused on short-term volatility, but nonetheless be mindful of the impact of that volatility on scheme funding matters. Discussions should be held with advisers regarding the long-term effects of market conditions in the context of a scheme's funding and exposure to risk.
- Current scheme valuations: Where triennial
valuation exercises have already kicked off, TPR expects those
exercises to continue as normal. Trustees are expected to consider
the TPR's annual funding statement, as well as its funding code
and associated guidance. It may be useful for trustees and
- undertake a higher level of sensitivity analysis to highlight the effects different scenarios may have on their schemes;
- understand the implications these scenarios have on the employer's recovery plan and strategic objectives; and
- check contingency plans and funding solutions.
With regards to monitoring investments – both in the case of DB and defined contribution schemes – TPR stresses the importance of understanding how the investment performance affects various members. Scheme funding levels should be regularly reviewed, with trustees and their advisers considering how volatility and market changes are affecting them.
Pensions law implications
Equalisation and GMP (Guaranteed Minimum Pensions)Equalisation
As with most post-Brexit matters, the position on pensions policy and legislation is unlikely to be known until negotiations surrounding the departure from the EU are well underway or completed. Given that much of pensions law is governed by UK statute, we do not foresee an immediate rush to overhaul the pensions legal landscape following Brexit.
One question which initially arose as a consequence of the Brexit vote was whether the UK Government will require schemes to equalise Guaranteed Minimum Pensions (GMPs) – a matter which stems from EU case law on the wider equalisation of benefits – or simply drop the issue. Perhaps in light of this uncertainty, Lloyds Trade Union (LTU) is reportedly launching an action through the employment tribunal system to require the equalisation of GMPs in respect of the Lloyds Banking Group's DB schemes. A successful case before the tribunal may give rise to similar actions from other groups of employees or representative organisations.
The LTU's claim may also incentivise the DWP to publish the long-awaited response to its 2012 consultation on GMP equalisation.
Irrespective of the outcome of the LTU case and/or the approach ultimately taken by the DWP in respect of GMP equalisation, schemes should still press ahead with GMP reconciliation exercises in conjunction with HMRC, to ensure that the data held on GMPs is as accurate as possible. HMRC will be providing assistance in respect of queries generated as a result of its reconciliation work up until December 2018.
The equalisation of normal retirement ages (NRAs) is another aspect of pensions which is a direct result of European case law in the 1990s, and has frequently been the cause of a headache or two for the trustees of defined benefit schemes and their sponsoring employers. It is not anticipated that any changes to the law regarding the equalisation of NRAs will flow from Brexit in the short term, but it is not unforeseeable that, following the UK's departure from the EU, future UK legislation or policy decisions of the UK government could result in changes to the way schemes need to approach this issue.
Other potential legal issues
All this without mentioning a multitude of other potential issues which might arise.For example, the possible impact if wholesale changes were made to TUPE laws in the UK (we expect that to be unlikely to happen, at least in the short term), or the possibilities of a second Scottish independence referendum and/or of Scotland staying in the EU.Might we end up with the position in which Scottish-based pension schemes are subject to Scots and EU laws, and schemes based elsewhere in the UK are subject to the laws of England and Wales/Northern Ireland alone?Time will tell: at this stage, we seem to have more questions than answers.
According to recent press reports, the EU and the UK Government are in dispute as to whom will 'pick up the tab' for the pensions of around 3,000 British officials who are or have been employed by EU institutions, once the UK leaves the EU. EU officials are currently entitled to a final salary pension worth up to 70% of their final basic salary at the end of their employment with the EU. The most recent estimate of the EU's total pension liabilities was £50.7 billion. Whilst the payment of those pensions is a matter which falls within the ambit of the EU budget, that budget is the shared responsibility of member states: no doubt this is another matter in which negotiations will play a key part in assessing the overall share of liabilities between the UK and the EU.
It is early in the Brexit process and there will be a lot more headlines before the full implications of the Brexit are known. As matters develop, we will provide further updates and commentary.
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.