Would Brexit mean less red tape for UK schemes?

Brexit could have a significant effect not just on UK-based corporations and employers but also their pension funds: these are not only at the receiving end of EU law on pension funds but as institutional investors are sometimes also affected by financial regulations.

Some say that this could make leaving the EU look like it would make things easier for Britain's pension funds.

Phil Cuddeford, head of corporate consulting at LCP, says: “At face value, it seems UK pension schemes would be better off out of the EU as they would then have only to cope with domestic regulations.” 

Direct and indirect effects

The regulatory challenges facing UK pension schemes come from a number of different angles. Some, such as the second version of the Institutions for Occupational Retirement Provisions directive, are specifically targeted at the pensions industry.

IORP II will be introduced this year and focuses on member statements, governance and trustee education; Anne Bennett, consultant at Mercer's retirement resource group, says it "should not be too onerous for UK pension schemes".

This has the potential to be an issue for schemes because they have many historic members from whom they do not have the necessary permissions potentially required under this new legislation

Maria Stimpson, Allen & Overy

Other legislation, such as the general data protection regulation, is not directly focused on the pensions industry but will still have an impact.

Maria Stimpson, partner at law firm Allen & Overy, says schemes have many historic members from who they do not have the necessary permissions potentially required under this new law. “This has the potential to be an issue for schemes.” 

There is a hope the requirements of this regulation will turn out to be less demanding than the worst-case scenario. Stimpson says: “The legislation should contain permissions which will allow effective administration of the schemes.”

But it is still an issue to which trustees will need to give some thought, she adds. 

Equalisation legislation is also having an impact on pension scheme administration. In particular, resolving the issues surrounding the end of contracting-out and equalisation of guaranteed minimum pensions are still causing a headache.

“It’s proving a major technical challenge,” Stimpson says, adding it would be a significant benefit if exiting the EU means pension schemes no longer have to grapple with the issue.

Interpretation issues

Further complications can arise from the way the European Court of Justice interprets legislation. Claire Carey, partner at Sackers, cites the example of early retirement benefits.

“Two European Court decisions have cast doubt on whether early retirement benefits are covered by the old age exemption contained in Transfer of Undertaking regulations, known as TUPE,” she says. 

This causes problems in practice, as those rights may transfer automatically to a new employer under TUPE, even where there is no similar scheme set up or any transfer payment made to fund such benefits. The solution usually involves negotiating some form of indemnity protection with the old employer. 

Financial directives 

Pension schemes are also not immune to financial directives, says Sebastian Reger, partner at Sackers focusing on finance and investment.

“The European Market Infrastructure Regulation will have the most direct impact on pension schemes.”

This legislation aims to reduce counterparty risk by introducing clearing to over-the-counter derivative transactions.

But these cleared transactions will require schemes to post cash collateral against these positions, which creates difficulties for pension schemes as they hold very little cash in their portfolios. 

Possible future regulations also cause concerns at UK pension schemes. While the industry has won the battle against the European Insurance and Occupational Pensions Authority’s attempt to introduce Solvency II-type regulations to UK pension schemes, the war is not yet over. 

Bennett points out that the holistic balance sheet could come up again in the next review of European pensions law. “The latest draft of the IORP directive does include a provision to review all the legislation in six years,” he points out.

Eiopa are incorrigible. Even though the European Council of Ministers has said this should not be included, they continue to try to push it through

Phil Cuddeford, LCP

There is speculation this will put the Solvency framework discussions back on the table, and it could be introduced in a future IORP III directive.

Cuddeford agrees: “Eiopa are incorrigible. Even though the European Council of Ministers has said this should not be included, they continue to try to push it through.”

Limited change

Given the current burden of impending legislation and concerns over future changes, exiting the EU might look like the best option for UK pension schemes; but even if the UK does leave, this would be unlikely to call a halt to the implementation of any new European legislation over the short or medium term – it would depend on the nature of the UK's relationship with the EU.

If, for example, the UK leaves the EU but remains a member of the European Economic Area, then it is likely the UK would be signed up to implementing any future IORP directives.

It might, however, be possible for the UK to soften the interpretation of some rules.

Carey says: “Brexit would mean the UK should no longer be subject to European Court rulings.” That would allow the UK to find its own solution to technically challenging issues like TUPE. 

But leaving the EU will not mean an immediate reduction of the existing regulatory burden. Carey says: “Over time, for example the pension regulator could have more freedom, but there is unlikely to be any appetite to roll back existing rights or rewrite current legislation immediately.”

Some regulations would be impossible to sidestep. Many of the financial rules have been set at an international level.

James Walsh, EU and international policy lead at the Pensions and Lifetime Savings Association, says much of the regulation of financial markets has been set at global level by bodies such as the International Organisation of Securities Commissions, or flows from G20 commitments.

In other words, the UK would need to draft its own legislation to comply with these international requirements.

Walsh says: “It’s impossible to predict whether pension schemes would be better or worse off outside of the EU – there are just too many unknown unknowns.”

It is unlikely, for example, the UK would simply adopt an off-the-shelf relationship with the EU identical to either Norway or Switzerland, Walsh says, adding that it is difficult to forecast the precise shape of the relationship with the EU, and how bound the country would be to legislation that impacts UK pension schemes.

Walsh says: “Of course it’s somewhat easier to predict the future if we remain in the EU. We would still have a seat at the table so that we could make our voice heard in EU negotiations.”

But the EU will not stand still – eurozone pressures will require more integration, he adds.