Brexit: The Pensions Fallout
In a referendum held on 23 June 2016, the UK voted by a slim majority to leave the European Union (EU), of which it has been a member in its various forms since 1973. The immediate aftermath saw record falls in the value of sterling and volatile stock markets, as UK Prime Minister David Cameron announced his resignation, triggering a leadership contest in the Conservative Party. In addition, the main opposition leader, Labour's Jeremy Corbyn has faced a rebellion of his own MPs, whilst Scotland's ruling SNP administration has already begun to consider the option of a second independence referendum.
The EU referendum result is not binding upon the UK Government and does not automatically trigger a notification under Article 50 of the Lisbon Treaty, the two-year mechanism by which an EU Member State can negotiate its withdrawal from the EU. The so-called "Brexit" is most likely to be triggered by an Act of Parliament or a decision of the new UK Prime Minister, who is expected to be in office by September 2016.
Given recent comments by senior EU officials and politicians, that no negotiations on the UK's status will take place prior to Article 50 being triggered, it remains likely, but not guaranteed, that the process will be commenced sometime later this year. Therefore, for the moment and indeed unless or until Article 50 negotiations are concluded, the UK remains an EU Member State and its rights and obligations under EU law continue as before.
Whilst the stock markets appear to have absorbed the initial shock of the EU referendum result – indeed many UK balanced and with profits funds are reporting slight rises in value since the referendum result was known – the longer-term effects, particularly on UK DB schemes, of falling bond yields and rising annuity prices are likely to push such schemes further into deficit. Already, the likelihood of a new buyer taking on Tata Steel's GBP£485 million pension deficit is receding.
Additionally, the UK Pensions Minister, Baroness Altmann, has spoken of the possibility of strengthening the Pension Protection Fund, cutting benefits, through the adoption of CPI rather than RPI for pension increases, or restructuring DB schemes completely.
Impact on Ireland
For Ireland, the economic shock of the probable departure of our neighbour and principal trading partner is yet to be fully felt. From a pensions law perspective, however, a number of questions appear to arise:
- What will happen to UK/Ireland cross-border schemes? Schemes in the UK and Ireland comprise 75% of EU cross-border schemes. If the UK is no longer subject to EU Directives, will there be a return to the bilateral agreements which were put in place for schemes covering the UK and Ireland? Will cross-border schemes be required to split into two schemes?
- Will it still be possible to transfer to a UK Scheme and vice versa? Ireland's Occupational Pension Schemes and Personal Retirement Savings Accounts (Overseas Transfer Payments) Regulations, 2003 do not distinguish between EU Member States and other countries, so a transfer to the UK will still be possible if the UK permits it. However, everything depends on whether the UK remains subject to EU law and, if not, what attitude it will take to pension transfers, both in and out.
- Can an Irish scheme still be approved by HM Revenue and Customs as a Qualified Recognised Overseas Pension Scheme (QROPS)? Again this will depend upon the UK's attitude to pension transfers post-Brexit.
- Will pension service companies continue to be able to rely on passporting between the UK and Ireland? Again this is likely to depend on whether the UK remains in the EEA. However, special arrangements have previously been put in place for non-EEA countries or territories like Switzerland and Gibraltar to be admitted to the passporting regime.
In addition, a UK departure from the EU and any subsequent agreement between Ireland the UK is likely to mean amendments to the Pensions Act 1990, as a number of sections relating to preservation, funding standard, payment of benefits, Court actions and investment by personal retirement savings accounts refer directly to the EU Member States.
Overall, whilst the future of the UK has yet to be determined, the coming period is likely to herald a period of economic uncertainty and the possibility of a UK recession. This will undoubtedly impact upon Ireland and the pension schemes established here, both cross-border and domestic.
Scheme employers and trustees will therefore need to work with their legal, actuarial and investment advisers to consider how best to negotiate the likely risks of Brexit.
Buy-Out Bonds and ARFs/AMRFs: New Rules
In a welcome announcement, the Minister for Finance has announced a relaxation in the rules on entry to an approved retirement fund (ARF) for holders of a buy-out bond (BOB) whose benefits derive from a transfer from a defined benefit (DB) scheme.
Following the coming into force of the Finance Act 2011, which extended the right to exercise the ARF option to members of defined contribution (DC) schemes, Revenue eBrief No. 72/11 confirmed that BOB holders would be entitled to exercise the ARF option where the benefits in the BOB derived from a scheme where the ARF option could itself be exercised.
The eBrief also clarified that, where the originating scheme was a DB scheme, the holder of a BOB would only be entitled to exercise the ARF option where the holder was a proprietary director.
It is expected that the change announced by the Minister will be included in a forthcoming Revenue eBrief. However, it remains to be seen whether the Minister will take the next step and allow the ARF option to be exercised directly by DB scheme members.
It also marks another step in the rehabilitation of BOBs, which were originally expected to be phased out following the introduction of personal retirement savings accounts in 2003.
IORP II: Final Proposal Unveiled
On 30 June 2016, it was announced that, following a two-year consultation process, the Council of the European Union and the European Parliament had reached agreement on the final proposal for a new EU Directive on institutions for occupational retirement provision (IORPs), the collective term for occupational pension schemes established in EU Member States.
The original IORP Directive (2003/41/EC) was transposed into Irish law on 23 September 2005. It included significant restrictions on the ability of IORPs to invest in unregulated markets and in illiquid assets such as property. It also required cross-border IORPs (those schemes to which an employer (called a "sponsoring undertaking") was making contributions to a scheme in another EU Member State) to be "fully funded at all times".
When proposals for the new Directive (known as IORP II) were published in March 2014, a key concern of the European pensions industry was the possibility that the Solvency II requirements would be extended to IORPs. In addition, the industry argued that the full funding requirement on cross-border schemes in the original IORP Directive was unduly onerous. The industry was also concerned about the level of detail in new standardised member benefit statements.
The final proposal for IORP II includes the following:
- recognition that cross-border IORPs can be underfunded in limited circumstances;
- slimmed down requirements on member benefit statements;
- a relaxation in the rules establishing cross-border pension structures;
- an easing of the rules for the transfer of IORP assets between EU Member States;
- a new non-binding mediation route, to be facilitated by the European Insurance and Occupational Pensions Authority (EIOPA), where disputes arise between EU Member State regulators concerning transfers; and
- greater responsibility to be placed upon IORPs to consider environmental and social investment risks, e.g. climate change.
In another victory for the industry, no additional solvency requirements will be placed upon IORPs.
The draft IORP II Directive is expected to be debated by the EU Parliament in September and then go to the EU Council for final approval, with transposition by EU Member States to follow within eighteen months. However, the ongoing Brexit crisis may affect this timescale.