Should the UK vote for Brexit on 23 June 2016, the immediate impact is likely to be felt in the investment sphere. From a legal perspective, little is likely to change in the short to medium term.
What would the legal impact of Brexit be?
A number of pieces of EU legislation, including the IORP Directive, affect occupational pension schemes in the UK. The continuing application of this legislation to the UK would depend on exactly how Brexit is handled and the withdrawal terms agreed, including any transitional measures. EU law gives an exiting member state two years from the date of formal notification of its decision to leave to negotiate the terms of its withdrawal. This period can be extended if all the other member states agree.
That said, the relevant EU legislative provisions have largely been incorporated into UK legislation and would not therefore fall away automatically following Brexit in any event. Given that much of the legislation in question deals with equal treatment and wider member protection principles, it is unlikely that there would be significant appetite within Government or Parliament to undertake a complete repeal or reform of this legislation. In the longer term, however, it is possible that there could be less wide-ranging adjustments in some areas.
Looking at some areas that are most directly impacted by EU legislation:
- Equal treatment the Government's current view that GMP equalisation is required derives, at least in part, from EU law. In the event of Brexit, the Government might feel able to specifically exclude GMPs from the general requirement to equalise benefits.
- Scheme funding the scheme-specific funding regime derives from the IORP Directive. The fundamental requirement for employers to fund schemes to a level which enables them to provide member benefits is unlikely to be changed, but adjustments might be made to the technical requirements on how assets and liabilities are valued for funding purposes.
- TUPE occupational pensions are excluded from the scope of TUPE, but EU case law (the Beckmann and Martin cases) has eroded this scope of this exclusion. The impact of these cases could be reduced following Brexit as UK courts might no longer feel bound to follow EU case law.
- Investment the current scheme investment restrictions derive in large part from the IORP Directive. While it is unlikely that most, especially those on employer-related investment, would be removed, some adjustments might be made in future.
- Data protection although the new EU General Data Protection Regulation would not automatically have direct effect in the UK, it is likely that schemes would still need to comply with its requirements in order to transfer data to the EU. In any event, the Data Protection Act 1998 (which implements the EU Data Protection Directive) would most likely continue to apply.
- Cross-border schemes the more stringent funding requirements that currently apply to cross-border schemes derive from the IORP Directive, and it is possible that these could be lifted following Brexit. However, UK schemes wishing to operate cross-border in more than one other EU member state would still be subject to the EU legislative requirements.
What would the non-legal impact of Brexit be?
The most significant immediate impact of Brexit for UK occupational pension schemes is likely to be felt in the investment arena. Views differ as to exactly what the investment impact would be, but a period of financial volatility seems likely, with consequential impacts on areas such as asset values, gilt yields and credit ratings.
For DB schemes, the impact on scheme investments would have knock-on consequences for scheme funding and the employer covenant (in addition to any more general impact of Brexit on the employer's business and therefore its covenant). Trustees would need to review their investment and funding strategies and their view of the employer covenant to ensure that they remain appropriate in light of Brexit. Any contingency plans should also be reviewed and updated as necessary. Trustees should also ensure that they continue to monitor these areas as negotiations for, and the actual implementation of, Brexit progress.
DC schemes would need to monitor the impact of Brexit on the investment options available under the scheme on an ongoing basis and consider whether any changes are required.