Our Knowledge

17.Mar.2017

Brexit Bill and IndyRef2: Implications for pension schemes

This week has seen two major political developments in the UK: the so-called “Brexit Bill” received Royal Assent, and Scotland’s First Minister confirmed her intention to call for a second referendum on Scottish independence. In this article, we consider the potential implications of these developments for trustees and employers of UK pension schemes.

Pensions legal framework
The pensions legal framework operates primarily at member state level. While European developments have had significant impact on pensions – notably the Barber case on equalisation between male and female members’ benefits – the vast majority of UK pensions regulation is contained in UK statutes and regulations.

Within the UK, pension law is largely identical north and south of the border and many pension schemes have members based in both English and Scotland. The primary distinction between English and Scottish pension schemes arises from differences in the common law of trusts applying under English and Scots law. There are some differences for Northern Irish based pension schemes too. At present, the jurisdictions of the Pensions Regulator, the Pensions Ombudsman and the Pension Protection Fund encompass the whole of the UK.

Implications of Brexit Bill
The passing of the Brexit Bill itself, and indeed the triggering of Article 50 that is expected to follow shortly, will have no immediate legal impact on UK pension schemes. However, as a further step towards the UK leaving towards the EU, it brings into focus the wider issues that schemes will need to address as the process continues. These include:

  • Sponsor covenant, investment and funding. Trustees of final salary pension schemes should continue to carefully monitor the covenant of sponsoring employers as the UK’s trade position is negotiated. The long-term market impact of Brexit remains to be seen, but trustees must work closely with their investment advisers and be prepared to take appropriate action as required.
  • Equalisation and equality. The principles of non-discrimination and equal treatment in occupational pensions have their roots in the EU, but they have subsequently been incorporated into UK law. One key area that is the subject of ongoing discussion and debate is the equalisation of Guaranteed Minimum Pensions (GMPs). It is not yet known whether schemes will be required to equalise GMPs following Brexit and trustees and employers should monitor developments closely.
  • EIOPA and solvency. The European Insurance and Occupational Pensions Authority (EIOPA) is responsible for setting common regulatory and supervisory standards and practices in the EU, including solvency requirements. In the past, the UK has successfully blocked developments that would have increased the funding requirement for UK pension schemes. Whether the UK will continue to be bound by EU solvency rules, and its ability to influence these in future, will be a matter for negotiation.

For more discussion of the potential implications of Brexit for pension schemes, see the recently published House of Commons Briefing Paper, Brexit – Implications for private pensions.

Implications of IndyRef2
Very little is known at this stage about the implications for private and state pensions of a potential second vote on Scottish independence. In 2013, a year before the first independence referendum, the Scottish Government published a paper outlining its vision for pensions in an independent Scotland, and we would expect a similar publication to be issued if a second referendum is to be held.

Some key issues that arose as part of the independence debate in 2014 include:

  • State pensions. The so-called “triple lock,” which guarantees to increase pensions each year by the higher of inflation, average earnings of 2.5%, was a key promise of both sides in the independence debate. With the policy under review by the Chancellor amid affordability concerns, it remains to be seen whether this will be part of the Scottish Government’s pensions’ platform.
  • Cross-border issues. Under EU cross-border rules, pension schemes with members in more than one member state must be fully funded at all times. This was a major issue in the first independence campaign, but with Brexit proceeding apace and Scotland’s ability to re-join the EU far from certain, there is additional complexity in assessing how cross-border requirements would apply and what impact these would have on scheme funding obligations.
  • Regulation, protection and taxation. As mentioned above, the existing body of UK pensions legislation is contained in UK-wide statute and regulations, which would need to be replicated for Scotland. Likewise, consideration would need to be given to how the Pensions Regulator, Pension Protection Fund and Financial Services Compensation Scheme would be replaced and funded in an independent Scotland. Pensions taxation would be likely to remain the same initially, but as the Scottish tax regime evolved, so too would the pensions tax system.

As we have seen with Brexit, the period of uncertainty surrounding a referendum can affect schemes’ investments, covenant and funding. Trustees and employers must continue to monitor the position and be prepared to take action if required.

What’s next?
The world of pensions is always changing and adapting to new regulatory environments and market conditions. Sponsors and trustees who keep aware of developments and prepare for different eventualities will be best placed to respond to future challenges and opportunities arising from this unprecedented period of constitutional change.

We will continue to publish updates as further detail becomes available. If you would like tailored advice on the implications of Brexit or IndyRef2 for your scheme, please get in touch with your usual Pensions Team contact.