The UK exited the EU at 11pm on 31 January 2020.
Although the UK’s exit from the EU last Friday does not have an immediate impact on pension law and regulation in the UK, as more details emerge of the likely nature of the UK’s future relationship with the EU, pension scheme sponsors and trustees should continue to monitor and assess the potential impact of any anticipated changes in the UK’s legal and trading relationship with the EU at the end of the transition period on the sponsors’ business and the scheme. It is critical that they prepare for all eventualities and ensure that contingency plans are in place to protect against material risks.
What happened on Friday?
On Friday evening, at 11pm, the UK officially ceased to be a Member State of the European Union. The UK and the EU are now in a transition period until the end of 2020 (or such later date as may be agreed). During this transition period:
- EU law continues to apply in and to the UK and the UK continues to trade with the EU as part of the Single Market
- directly applicable EU legislation, such as the Institutions for Occupational Retirement Provision Directive, the Equal Treatment Directive and the General Data Protection Regulation, continues to apply in the UK, and
- decisions of the Court of Justice of the European Union continue to be binding on UK Courts (including any decisions made during transition).
There will now be an intense period of negotiations to seek to finalise the details of the future relationship between the UK and the EU.
The future relationship – potential outcomes
There are a range of potential outcomes at the end of the transitional period. This includes:
- a comprehensive free trade agreement (FTA) – this could be based on the FTA that the EU has agreed with Canada or perhaps go even further than this – a so-called ‘Super Canada’ FTA
- a limited FTA – this could, for example, eliminate tariffs and quotas on trade in goods and contain more limited provisions on financial services and level playing field conditions
- a ‘bare bones’ FTA – a more limited deal still, this could see the introduction, rather than the removal of tariffs on goods with little, if anything, being agreed on services – at least for now. On rules and regulations, the more the UK diverges the less market access it is likely to enjoy, or
- no deal – this would mean that the UK and the EU would be required to trade on World Trade Organisation terms. The UK would also be treated as a ‘third country’ for the purposes of EU financial services regulation and for other purposes.
Even in the event of no deal, there would be no immediate material changes to UK laws governing workplace pension schemes, including those relating to scheme funding, governance requirements, data protection, equal treatment and the protection of members on insolvency. However, the UK would be free to diverge from EU law on these issues over time. Although any attempts to reduce or amend the UK’s pension laws and regulatory requirements post-Brexit may be impacted by any agreement on the future relationship.
The agreement on the UK’s future relationship with the EU, if any, will also determine whether the UK is required to follow future EU laws and CJEU decisions relating to pensions.
There is unlikely to be much certainty regarding the outcome of the negotiations on the UK’s future relationship with the EU until the end of 2020. Therefore, the adage “plan for the worst, hope for the best” continues to apply, meaning schemes and sponsors should continue to prepare for a no-deal scenario.
Whatever the outcome of the negotiations, there are three key risks that trustees and sponsors need to assess and, where possible, mitigate. These are the potential impact of the new arrangements or no deal on:
- the sponsor’s business and financial strength
- scheme investments, and
- scheme funding and security arrangements.
As the negotiations unfold, trustees and sponsors should also work together to consider whether the balance of their scheme’s funding, covenant and investment risks remains appropriate.
There are additional issues that may also need to be considered in the event of no deal or only a ‘bare bones’ FTA being agreed, including the need to ensure that suitable data protection agreements are in place with EU partners.
Impact on sponsor
Pension scheme sponsors need to assess the potential impact of any changes in the UK’s legal and trading relationship with the EU on their business and on its financial position. In particular, they need to understand the potential impact on their business of market volatility, the introduction of tariffs and other barriers to trade, disruption to supply chains, restrictions on market access (for example, in relation to financial services) and changes to immigration rules. The potential impact of changes in the UK and the EU’s political landscape should also be assessed. Contingency plans should be put in place to address all material risks.
Pension scheme trustees should engage with their scheme’s sponsor to understand the potential impact of any changes in the UK’s legal and trading relationship with the EU on the sponsor’s business and how this may affect its support for the scheme. Trustees should also ask for details of the contingency plans that are in place to address any major risks to the sponsor’s business.
Impact on scheme investments
The ups and downs of the Brexit negotiations and the resulting political fallout has already resulted in significant market volatility. This is likely to be repeated as the negotiations on the future relationship intensify. The potential economic impact of any changes in the UK’s trading and legal relationship with the EU could also affect asset values and investment returns over the longer term.
Trustees of defined benefit schemes should take advice on the potential impact of the negotiations and the nature of the UK’s future relationship with the EU on their scheme’s investment strategy and what steps they might take to mitigate downside risks.
Trustees of defined contribution schemes should review the investment funds that are available to members and consider whether they remain appropriate in light of any material short and longer term risks to members’ funds.
Impact on scheme funding and security arrangements
Market volatility and the economic impact of changes in the UK’s legal and trading relationship with the EU may impact the funding level of defined benefit schemes. Sponsors and trustees should consider how this may impact funding and security arrangements that are in place. For example, contingent payments under funding or security arrangements may be triggered where a scheme’s deficit increases or there is a weakening in a sponsor’s financial position. The impact of any contingencies being triggered on the sponsor’s business should also be assessed.
No-deal – additional issues
Payments to members who live in an EU27 member state
Concerns have been raised about the ability of UK insurers to make payments to individuals living in an EU27 member state in the event of no-deal. However, many insurers are putting in place contingency plans to enable them to continue to make these payments, where possible. In addition, certain member states have indicated that they will continue to allow payments from UK insurers at the end of transition even if this issue may not have been resolved as a matter of law. Therefore, it is hoped that any disruption to payments would be minimal.
Occupational pension schemes are not subject to the same rules as insurers in relation to payments within the EU. Accordingly, there is no reason why UK occupational pension schemes should be prevented from making such payments.
Sending personal data to the EU
The UK Government has confirmed that in recognition of the unprecedented degree of alignment between the UK and EU’s data protection regimes, the UK would, at the end of transition, continue to allow the free flow of personal data from the UK to the EU. However, it plans to keep this under review. The UK Government also plans to recognise EU adequacy decisions made with third countries (eg Japan) prior to our exit from the EU.
Receiving personal data from the EU
The European Commission has stated that if it deems the UK’s level of personal data protection essentially equivalent to that of the EU, it would make an adequacy decision allowing the transfer of personal data to the UK without restrictions. However, the Commission has said that a decision on adequacy cannot be taken until the UK is a third country and it is unclear how long it will be before any decision is made.
If the European Commission does not make an adequacy decision by, or immediately after, the end of the transition period and schemes or other organisations want to receive personal data from organisations established in the EU (including data centres), then they will need to work with their EU partners to identify a legal basis for those transfers. In most cases, this will require standard contractual clauses to be put in place.
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