UK voted to leave the European Union in a country-wide referendum on 23 June 2016. The electorate turnout was 71.8% - with more than 30 million people voting - the highest turnout at a UK-wide vote since 1992. While London and Scotland voted overall to Remain a member of the EU, results from Wales, and the majority of England secured a Leave victory. Scotland voted to Remain by a margin of over 20%.
At Charles Russell Speechlys we work with clients from a range of backgrounds. The referendum result is likely to have significant implications for clients in a variety of ways across a range of industries. Our sector experts are working closely with clients to advise on the legal considerations for businesses and individuals and how best to manage their operations and investments in the short term within the current regulatory framework and beyond. We recently presented a webinar on Implications of Brexit for employers which covered: pensions, employment and immigration, please click here to listen to the recording, and below I have answered some of the questions which arose from the webinar about pensions. Please also read the Q&As for employment and immigration.
I HAVE A DEFINED BENEFIT PENSION ARRANGEMENT – WILL BREXIT RESULT IN A LARGER DEFICIT?
The major volatility in the financial markets since the Brexit vote has certainly resulted in some pension schemes seeing a material increase in their deficits. However, other pension schemes will have seen little change while others will have seen an actual improvement in their financial position. The difference in outcome will result from a difference in the investment strategies of those different schemes. While investment advice is not a matter for Charles Russell Speechlys to comment, it is certainly the case that employers and trustees should be looking at the immediate impact of Brexit and trying to establish if it has created any opportunities to de-risk. For those pension schemes that have seen an improvement in their position they may find that the cost of buying-out their liabilities may fall as there may be fewer schemes in the market. If this is the case, then the employers and trustees will need to ensure that their data cleansing process is in a good position to take advantage of any opportunities in the market.
WILL BREXIT MEAN THE ISSUE OF GUARANTEED MINIMUM PENSION EQUALISATION WILL DISAPPEAR?
The short answer is that it might. The UK Government has never really reached a conclusion as to whether GMPs need to be equalised for pension schemes outside of the Pension Protection Fund. We were told that the UK Government had received legal advice that equalisation was required and we were lead to believe that EU law was the driver behind this advice, but although UK legislation has been promised, it has not so far materialised. Will the issue go away on Brexit? Well that depends on the deal struck with the EU. However, we would expect that in reality until the implications of Brexit are finalised, most schemes seeking to secure benefits with a buy-out will still either equalise or seek insurance against the risk, and on-going schemes will continue to wait-and-see.
WILL THE GOVERNMENT REQUIRE EMPLOYERS TO PUT MORE CASH INTO THEIR DEFINED BENEFIT PENSION SCHEMES?
The Government’s stated position is that the best way to ensure that a pension scheme promise will be delivered upon is via a strong and stable sponsoring employer. In short this means that the government will seek to encourage employers to invest in growth rather than simply use cash assets to reduce pension liabilities. However, this is no one size fits all approach. Many employers are sitting on material cash reserves. For these companies the Pensions Regulator and Government will expect them to use some of those assets to address the pension scheme deficit in the same way they would approach other company creditors. The fall-out from BHS and Tata Steel pensions underfunding is still to materialise. We would be surprised if this leads to a material increase in Regulator powers. However, we would not be surprised if they led to greater encouragement for employers to reduce their pension scheme liabilities where this is feasible.
WILL THERE GOVERNMENT REDUCE PENSIONS TAX RELIEF IN ORDER TO INCREASE TAX RETURNS?
The previous Chancellor clearly had issues like the 40% tax relief for higher earners and the 25% tax free lump sum in his sights ahead of the March 2016 budget statement. Whether he dropped these changes for economic or pre Brexit vote political reasons we can only speculate. However, it would be easy for a new Chancellor to re-visit this issue especially on the back of the new Prime Minister’s statement that she will end some tax breaks for the rich.
HOW SHOULD I DEAL WITH BREXIT ISSUES WHEN TALKING TO THE PENSION SCHEME TRUSTEES?
During these uncertain times it is vital for both employers and their DB scheme trustees to maintain an open and continuing dialogue about Brexit. The key issues will be: the impact on the sponsoring employers’ financial covenant; the changes to the funding assumptions that should follow; and how Brexit impacts on the pension schemes investment strategy. The Pensions Regulator will expect trustees to be seeking detailed financial forecasts from the employers in light of Brexit. Therefore, those employers that have greater exposure to a falling pound or who rely on the EU market for their business will need to explain what strategies they have in place to address the different possible outcomes of Brexit negotiations. Scheme investment strategies must be set by the trustees in light of consultation with the employer. Therefore employers that wish to move their schemes away from volatility, or towards more growth assets will need to engage with their trustees in order to take advantage of the opportunities presented by changing markets.