Over recent weeks the focus in Europe has been entirely on the concept of "Grexit", that is the potential for Greece to leave the Eurozone and/or leave the EU altogether. This is rather overshadowing something of more immediate impact to UK pensions, which is the possibility of a British exit from the EU, referred to as "Brexit". With a referendum promised by 2017 and strong Eurosceptic showings at the general election, together with the challenging times that Europe and in particular the Eurozone are presently enduring, the scenario of Britain leaving the EU seems more plausible than at any time in recent years. Pensions Pieces would not be so rash as to try to predict the outcome of the referendum, but instead this article looks at what would happen in the world of pensions and in particular their regulation if we did so.
A noticeable proportion of the legislation regulating pensions comes from the EU. However, most of it has been passed into UK law so that simply by leaving the EU it would not cease to apply. For example, even that most dramatic provision of the Treaty of Rome that men and women should be paid equally for equal work, which gave rise to all the equalisation issues in pension schemes, is enshrined in UK law, presently under the Equality Act 2010.
On the other hand, those statutes and regulations will no longer be subject to the jurisdiction of the Court of Justice of the European Union so, following a Brexit, they would be interpreted purely in the UK context, rather than by reference to EU treaties and directives. In addition, Parliament will be able to repeal any of those statutes and regulations if it so chooses.
So, Brexit would not immediately make any changes to the UK Pensions regulatory environment. However, it would give the government and the courts the ability, over time, to amend those laws that have a European root and it is those laws that we should consider in thinking whether Brexit will change the treatment of UK pensions.
Equalisation and Equality
Most law about discrimination (although not all) within the UK employment environment is set out in EU directives. These were consolidated in the Equal Treatment Directive which gave rise to the UK's Equality Act in 2010.
The equal retirement age for men and women under pension schemes was first decided in the case of Barber v Guardian Royal Exchange in 1990 and has, of course, given rise to a large number of challenges about the differences between benefits provided for men and women since the date of that judgment, 17 May 1990. However, there are much wider implications of European equality legislation, not least the concept of indirect discrimination which means that roles primarily taken by one sex or the other should not be discriminated against, such as part time workers, who are predominantly female.
Other forms of discrimination bring challenges for pension schemes, most obviously age discrimination. Pension schemes which are inherently age-based and are often structured so as to take account of the differing effects of benefits on different age groups. There are also challenges in relation to disability discrimination and the treatment of employees with ill health pensions.
It seems unlikely that these rules would be removed completely following a Brexit. There are other controls in place to deal with discrimination, not least from the European Convention on Human Rights (although there have been suggestions that the UK may also leave that). More fundamentally, the roots of race and sex discrimination legislation lie before the UK's entry into the EU and most would accept that they are an important part of a civilised society. However it does seem entirely plausible that discrimination legislation may be re-framed and certain benefits such as pensions may be exempted from some provisions.
Valuation of benefits
The Pensions Act 2004 was drafted in the light of the IORPs Directive 2003 which related to the governance of pension arrangements. One particular provision of IORPs was the requirement for pension schemes to assess their "technical provisions" (a EU term), which is calculated by an actuary on "a sufficiently prudent actuarial valuation". This must be done at least annually, or every three years as long as it is certified every year. This structure, of course, is familiar to anyone who has dealt with the funding of defined benefit pension schemes in the UK and is the framework of present valuations carried out under Part 3 of the Pensions Act 2004.
Again, this replaced an existing requirement for valuations every 3 years under the Pensions Act 1995 which required funding to be at least as good as the much more prescriptive minimum funding requirement (MFR). It seems unlikely that Brexit would give rise to a repeal of this piece of legislation or a return to the minimum funding requirement, as it is largely felt that the scheme specific funding provisions of Part 3 of the Pensions Act 2004 have been a distinct improvement on MFR in managing scheme funding appropriately. However, the influence of EU thinking on this subject and in particular the views of EIOPA (the European Insurance & Occupational Pensions Authority) may be significantly reduced. It would be perfectly possible for the Pensions Regulator to issue new defined benefit guidance which moved away from EIOPA thinking around the holistic balance sheet if it felt this was appropriate
One of the particular challenges that the IORPs Directive threw up for the funding of defined benefit pension schemes was the requirement that a defined benefit pension scheme that operated cross-border would be fully funded on its technical provisions at all times. This had the inevitable effect of a large number of pension schemes withdrawing from having any cross-border element ahead of the implementation of the legislation so as not to be subject to this requirement. It would seem likely that this would be relaxed for UK schemes outside the EU. As a scheme operating between the UK and a EU member state following Brexit would not be cross-border for the purposes of the IORPs Directive (because Britain would not be a member state), a cross-border scheme operating between Britain and one EU country would be easier to operate and arguably substantially more attractive. It is possible that the effect of this may be to make the UK an attractive country with which European countries can operate a cross-border arrangement.
One of the biggest challenges relating to pensions in the field of M&A is the issues relating to the treatment of pensions under the Transfer of Undertakings (Protection of Employment) Regulations 2006, known as TUPE. TUPE is legislation under the Acquired Rights Directive which effectively requires that if a business is bought (rather than shares) the employees attached to that business automatically transfer across on the same terms and conditions. The treatment of pensions under this provision are complex and will depend on whether the rights are personal pension rights (which do transfer) or occupational pension scheme rights (which give rise to a right to a certain contribution rate rather than to the same benefit). In addition, two cases in front of the European Court of Justice, Beckmann v Dynamco Whicheloe MacFarlane 2002 and Martin v Southbank University 2003, further complicated matters by saying that certain pension benefits are replicated as they do not fall within the exemption, largely those in relation to early retirement and redundancy.
As presently drafted, this legislation presents challenges for the UK pension system that do not apply so significantly to many other countries, which causes debates about indemnities on acquisitions. As a result, following Brexit, it would not be unlikely that some adjustment may be made to TUPE. Some commentators had suggested that TUPE (itself unpopular with Margaret Thatcher's first government in 1981 when it was passed following European Directives) might be removed altogether, radically changing the treatment of pensions on asset deals and focusing attention perhaps instead on the funding of the scheme should the employees be transferred elsewhere.
Other European Provisions
Most of the other provisions in the IORPs directives or other European legislation applying to the UK are unlikely to have significant effect. This includes provisions such as the requirement for a statement of investment principles and annual report and a requirement for certain information to be given to members, which reflected requirements already in force in the UK at the time the directive was passed. Others, such as the requirement for trustee knowledge and understanding arguably reflected the basic requirements of trust law and so brought nothing new to the UK requirements.
Brexit will not automatically make any significant changes to the operation of UK pension schemes. It would, of course, give Parliament much more freedom to make amendments to pensions legislation if it so chose. Certain areas such as TUPE controls and consultation requirements are particularly vulnerable but it is likely that the very significant influences of discrimination and scheme funding will not be radically changed by Brexit. Many of the most onerous parts of the UK pensions legislation such as the challenges to amending schemes under section 67 and requirements to fund schemes on termination or an employment cessation event under section 75 of the Pensions Act 1995 are affected by Europe. The major challenges for UK pension schemes are unlikely to be significantly affected if the UK were to leave the European Union.