Brexit: Implications for UK Pensions Schemes

The procedure for the United Kingdom to exit the European Union under Article 50 of the Treaty on European Union and its effects are unprecedented. Once the UK has left the EU, all its obligations under the various EU treaties will cease to apply. However, in relation to occupational pension schemes, the legal and practical day to day operation of such schemes will remain largely unchanged. This is because a substantial amount of EU law has already been incorporated into UK national law. We are yet to see to what extent national law will be stripped of EU law elements and which aspects will be retained.  

For example, the equal treatment provisions under the EU Treaty are now contained in the UK Equality Act 2010. If an occupational pension scheme does not contain an equal treatment rule it is to be treated to include one. In reality, many schemes will have amended their rules to contain such a rule, and it is unlikely that a post-Brexit government will seek to dismantle the Equality Act 2010, so there is unlikely to be any change here.

However, one area that is likely to be affected is the equalisation of Guaranteed Minimum Pensions (GMPs) for members of occupational schemes that were contracted out of the additional state pension. A GMP is the minimum level of pension a member is entitled to receive under a former contracted-out salary-related (COSR) scheme. It is based on the amount the member would otherwise have received under the additional state pension for the period he was contracted out of it. (GMPs ceased to accrue after 5 April 1997 and contracting-out on the salary-related basis was abolished on 6 April 2016.)

UK pensions legislation provides that GMPs are payable from age 60 for women, but from age 65 for men. There have been years of uncertainty over whether EU law requires GMPs to be equalised between the sexes but the DWP had finally indicated that it intended to issue draft legislation and was set to bring out a consultation on how best to implement it. Due to Brexit there must now be a real possibility that it could drop the legislation altogether. Given that the consultation on the regulations was expected in this Parliament, its implementation now most likely depends on the nature of the UK’s future relationship with the EU.

A more immediate impact of Brexit on occupational pension schemes will be its effects on the markets and the likely impact that will have on the funding level of such schemes. Trustees may wish to consider looking again at their sponsor’s corporate risk analysis and seek to update their covenant advice where appropriate. Employers may find that their recovery plans (to meet the funding deficit) need to be revised in light of the sudden change in performance of their funds. This will not be the case with all defined benefit occupational schemes and will vary from scheme to scheme.

Personal pension schemes are unlikely to be affected by Brexit. They are regulated by guidance and codes of practice which are inherently UK in nature. The Government intends to review the guidance and codes of practice in 2017, to determine whether specific legislation will be required. This process will remain unaffected by Brexit, although the government may be distracted on other pressing issues which might affect the timetable. Time will tell whether there is any tension between the financial market legislation and EU law and how that might impact personal pensions, if at all. The more immediate impact, like occupational pension schemes, will be on the performance of the individual’s fund due to the volatility in the markets.