It is almost a year since the United Kingdom left the European Union, and for the past year we were in what was known as the 'transition period'. That period ended at 11pm on 31 December 2020, at which point the UK-EU Trade Agreement took effect.
The media has been full of reports on the various implications of Brexit and the Trade Agreement; but despite this, perhaps you are still wondering what the Brexit consequences may be for pensions? In this article we consider some of the key points, dividing them into direct (practical) impacts, and indirect (potential) impacts.
Brexit – direct effects
The number of direct implications of Brexit on the pensions world is relatively low.
A few banks have ceased, or intend to cease, providing banking services to UK nationals resident in the EU. This may, of course, cause issues for making pension payments to pensioners who have retired overseas. Pension scheme trustees and managers may wish to consider whether they have any beneficiaries in receipt of pension living in the EU, and whether it may be helpful to contact those members to highlight this potential issue. Fortunately, other than this possible practical issue, there are no tax or legal barriers to paying a UK pension to an overseas resident individual.
Likewise, there are considerations for employers and pension scheme trustees who receive financial services from EEA-based providers. Changes to the laws have been made to ensure that these providers can continue to provide services to customers and that their customers will remain protected. To benefit from this, providers need temporary permission to operate in the UK while they seek FCA authorisation. Trustees and employers should be aware that some providers may decide not to continue doing business in the UK, in which case they can continue working under their existing contracts while they wind down their UK business.
Finally, an area that many were concerned would be negatively impacted by Brexit was the State pension provision for UK nationals resident overseas. Thankfully it seems that the arrangements will remain broadly the same as they were before the UK left the EU. This means that periods of entitlement to State retirement benefits accrued while living in the EU can be aggregated at retirement, and also that the UK State pension (which will continue to increase annually) can be claimed by UK nationals living in the EU, EEA or Switzerland on 31 December 2020 and for those moving there any time after that date.
Brexit – indirect impacts
Whereas the number of direct implications of Brexit on pensions is relatively low, there are expected to be many indirect impacts. Trustees and employers with defined benefit pension schemes will likely be seeing some of these already. Any employer that trades heavily with the EU, or with businesses that themselves rely on EU trade, may have already been impacted by increased administration and costs of doing business.
Similarly, employers that historically rely on EU funding (for example through the Common Agricultural Policy) are likely to see a gap in funding. Of course, some employers will benefit financially from the changes brought about by Brexit, so it is not only a tale of gloom. Either way, it is important that pension scheme trustees, in particular, pay close attention to the financial impacts on scheme employers, and that their assumptions on employer covenant along with their investment strategy are updated accordingly.
The indirect impacts of Brexit are not limited to defined benefit schemes – market volatility impacts defined contribution schemes as well, particularly for those savers who are close to retirement, or who have retired and have funds in drawdown. Employers who make pension provisions through a defined contribution scheme may want to consider communicating with their employees about market volatility and how the scheme's investments are being managed.
All schemes should also check whether they receive personal data from the EU or EEA. The EU has yet to determine whether the UK's data protection rules are adequate. At the moment, we benefit from a grace period of four months (possibly extending to six months) where the old rules continue to apply, but schemes should ensure that contracts with any service providers sending personal data from the EU or EEA are updated to ensure that data flows can continue after April 2021.
The other key area for consideration is that of EU pensions law. The UK is no longer required to implement EU legislation, and previously implemented legislation could in theory be repealed. That said, you may remember Andrew Bailey (then head of the Financial Conduct Authority) saying in July 2016 that there "would be no great bonfire of regulations". Many of the laws we have as a result of EU legislation or case law are laws that we will want to keep. Take, for example, the requirement to treat same-sex couples in the same way opposite-sex couples are treated. The ability to change some parts of pensions legislation following Brexit exists, but it is unlikely there will be an appetite to change much.
One area that is perhaps more vulnerable to change relates to overseas pension schemes and the application of the overseas transfer charge. The 25% charge applies on a transfer of funds from a registered pension scheme to a qualifying recognised overseas pension scheme ('QROPS'). There was an exemption from the charge where the member and the QROPS both reside in the EEA, and this exemption now applies where the member is resident in either the UK or EEA and the QROPS is in the EEA (or Gibraltar). Without the direct application of EU pensions law, however, there is in fact no requirement for this exemption to be maintained at all so it is foreseeable that this exemption may disappear altogether in the future.
Finally, the UK courts are no longer bound by decisions of the Court of Justice of the European Union. This also means that the UK Supreme Court and the Court of Appeal will be able to depart from CJEU decisions, and it is likely that over time the UK courts' interpretation of the law may differ from the decisions of the CJEU. This could have an impact on areas such as the equal treatment of persons (whether based on gender or sexuality), data protection, Pension Protection Fund compensation levels, and the transfer of employees between businesses.
As the UK and Europe adapt to life post-Brexit the greatest implications for pension schemes and those who operate them will likely be the practical impact on businesses, and therefore employer covenants, and the impact of market volatility on scheme investments. In other respects, and particularly where legislation is concerned, it seems likely that the pensions world will be relatively unmoved.