It should probably come as no surprise, given the uncertainty that has surrounded the Brexit process since the referendum result in June 2016, that with less than two and a half weeks to go until the UK officially becomes a third country vis-à-vis the EU we still do not know the terms on which this will happen. Notwithstanding this uncertainty, there are some things that we do know. In particular, new legal and regulatory barriers will apply to many UK businesses that trade with or provide services to customers within the EU from 1 January 2021. There are also a number of steps that trustees and sponsors should be taking to ensure that they are prepared for all eventualities.
Impact on scheme investments
The ups and downs of the Brexit negotiations have already resulted in significant market volatility and currency fluctuations. This is likely to continue as the negotiations reach a climax and as the implications of Brexit (whatever form it takes) play out. The impact of changes in the UK’s trading and legal relationship with the EU (and, as new free trade agreements are agreed, with the rest of the world) could also affect (positively or negatively) asset values and investment returns over the longer term.
In the run up to 31 December, trustees of defined benefit (DB) schemes (to the extent that they have not already done so) should take advice and ensure they have plans in place to respond to the impact of a deal or no deal on their scheme’s investment strategy (including inflation and currency hedging) and to mitigate the 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 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. 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, changes in the value of Sterling, restrictions on market access (for example, in relation to financial services) and changes to immigration rules. Contingency plans should be in place to address all material risks. More information on the impact of Brexit on businesses can be found on our Brexit hub.
Pension scheme trustees should also assess the potential impact of the imminent changes in the UK’s legal and trading relationship with the EU and the possible introduction of tariffs and disruption to supply chains on their sponsor’s business and how this may affect its support for the scheme. Assessing the potential impact of any deal that is reached, or of no deal, will be particularly urgent where sponsors are already struggling as a result of the impact of Covid-19. 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 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 DB 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.
Impact on members living in the EU27
As a result of the UK leaving the EU single market, some UK banks may be forced to close the UK bank accounts of individuals living in the EU27. This could mean that schemes with pensioners in the EU27 may be prevented from making payments to some pensioners. Schemes need to be prepared to respond on behalf of members who find themselves in this position and to find a suitable work around.
Impact on UK law and regulation
When the transition period ends at 11pm (GMT) on 31 December 2020, the UK will no longer be treated as an EU member state but instead as a third country for the purposes of EU law. From this point onwards, relevant EU law which has been retained in UK law by virtue of the European Union (Withdrawal) Act 2018 will continue to have effect.
Deal or no deal, there will be no material changes to UK pensions law and regulation at the end of the transition period. However, the scope for the UK to diverge from new and existing EU law over time (in a pensions context and on other matters) will be determined by the terms of any agreement on our future relationship that is reached. In any event, it is expected that future decisions of the Court of Justice of the European Union will no longer be binding on UK Courts.
We will consider the impact of Brexit on UK law and regulation in more detail in future posts, once the terms of any agreement between the UK and the EU are known.
More information on the impact of Brexit on businesses and schemes can be found on our Brexit hub.
Our pensions Brexit guide also contains additional information on the potential impact of a deal or no deal on pension schemes, sponsors and on the nature of the UK’s future relationship with the EU.
If you have any queries about the impact of Brexit on your business or scheme speak to your usual HSF adviser or contact one of our pension specialists.