All around the country, businesses, communities and individuals are coming to terms with a future in which the UK (or what is left of it should another referendum on Scottish independence trigger a fragmentation of the UK) is outside the EU.
However, what the future holds remains uncertain and much of the political chat is around the UK's plans and the design of its relationship and future links with the EU.
Leaving the EU is likely to have an impact across the board and in several areas specifically relating to UK pensions. The pound is currently at a 32 year low and the stock market has predictably reacted to the uncertainty. One of the key immediate considerations, therefore, for trustees of pension schemes and sponsors is how to manage and deal with the investment volatility that is likely to be part of the immediate to mid-term future.
While it would not be sensible to make any kneejerk decisions, we would expect trustees to be seeking appropriate advice and looking in detail at their investment strategies and portfolios. Nothing may change but it would be best practice to assess with appropriate investment advice whether there are any immediate concerns and, if there are, there is a need for action to be taken. The outcome of such a review is likely to be an agreement to monitor progress (or lack thereof) and may include agreed terms of reference and/or markers which, if triggered, would put into motion a pre-established course of conduct or action. Certainly by looking at issues now, both trustees and sponsors should be in a better position to act quickly and decisively if the need arises.
Sponsoring employers' covenants are likely to be an area of focus given the agreed and new evident economic uncertainty and shock to the UK economy. Businesses should and, we feel, will reconsider their commercial strategies, their business investment decisions and their future market places. For their part, trustees may ask for information, reports and guidance in the coming months from their sponsoring companies as to the anticipated impact on business and how that might itself impact on the covenant provided to the pension scheme. It is often a regular feature of trustee meetings for there to be an update from a representative from the sponsoring company as to how things are going within the business, such updates following the EU vote are likely to be more interesting and challenging than they have been in the past.
Trustees will be concerned to ensure that there is clear leadership, and a management group that they can have confidence in given the likely challenges ahead. Trustees should be alive to changes in personnel at a strategic level and seek reassurances if they are concerned.
There is also likely to be a direct impact although perhaps not in the short term on the legislation that governs pensions in this country . The laws that apply to and affect pension schemes in England/ Wales have in many cases derived from EU legislation, EU cases and the general requirement for commonality within the EU. In this particular regard, much EU legislation and case law is based on principles of equal treatment / non-discrimination which the EU then expects to be applied to or transposed into the laws of member states. Specific examples of these principles have seen EU legislation transposed in to English law. The requirement to equalise normal retirement ages for men and women in pension schemes came from the 1990 ECJ case of Barber. This has had a significant and enduring impact on national pension schemes and it has also caused the UK Government to require guaranteed minimum pensions (GMPs) to be equalised in accordance with the same principle. It would take too long to explain the complexities around GMPs and their equalisation; suffice it to state for the moment that a GMP is designed to replicate part of the state pension (formerly the state earnings related pension or SERPS) which certain members' pension schemes contracted out of for scheme membership between April 1977 and April 1997. Given that this requirement in particular has its foundation in EU law, it is possible that an exit from the EU will cause this especially complex (not to say contentious) requirement to be shelved. For many practitioners, this, if it happened, would constitute a welcome development.
Notwithstanding the comment above about GMPs, it is not clear which laws, if any, would or might change as a result of the UK leaving the EU. What we can state with confidence is that English / Welsh case law is likely to become the driving regulatory force without EU restriction. In addition, without EU influence, the Government can drive national legislation generally and perhaps UK pensions specifically in the direction it wishes. This could have the benefit of allowing regulation and legislation that is more sensitive to the peculiarities of this country's pension system.
The Way Forward
The uncertainty currently being experienced in all areas of UK commercial, political and personal life means that the way forward is far from clear.
That point having been made, trustees and corporate sponsors of pension schemes can take steps now to get contingency plans in place in anticipation (as opposed to reaction) of possible outcomes.
We would expect corporate entities to look at their business strategies and it follows that trustees would then be able to access details of post Brexit plans with a view to gaining reassurance on employer covenant.
We would expect trustees to seek investment advice to ensure that any investment decisions are taken good time and on an informed basis. Any particularly EU sensitive investments or securities, particularly likely where pension schemes have a non-UK, EU sponsoring company (whether directly or as part of a group), will require close attention.
Trustees should also be alive to the possible anxieties of scheme members and consider whether they want to issue a statement, perhaps drafted jointly with the company, ready to deliver to members concerning the EU vote.
Individuals are also likely to face further challenges. The purchase of annuities, particularly at so uncertain a time, should be considered only on receipt of clear (independent) financial advice so; where individuals are able to delay purchases, it would seem sensible to do so (as above on advice). The new flexibilities giving members more freedom require members to be financially astute and now more than ever, they should seek appropriate (financial) advice before making any decision.