The EU regulatory framework currently impacts on UK pension schemes in a number of ways.

Equal treatment

The Equality Act 2010, which aims to implement the requirements of the EU Framework Directive on discrimination, is the consolidating legislation that now prohibits pension schemes from discriminating on grounds such as a member’s sex, age, sexual orientation and religion. (Many of these requirements have their roots in CJEU case law, older Directives and predecessor domestic legislation.) Practically speaking, the most pertinent examples are the requirements: to have equal retirement ages as between men and women; to admit part-time workers into pension arrangements on the same basis as full-time staff; and not to follow any age-discriminatory practices when operating pension schemes. The majority of schemes have amended both their rules and their administrative practices to comply with these requirements and in some cases provide more generous benefits than the minimum now required.

Scheme funding

First, the Cross-Border Regulations, which implement certain requirements of the IORP (Institutions for Occupational Retirement Provision) Directive, subject UK cross-border schemes to more stringent funding requirements than UK schemes not operating cross-border as well as requiring them to be approved by the Pensions Regulator. As a direct consequence the vast majority of UK schemes with international employees took specific steps, back in 2005 when the Directive was being implemented into domestic legislation, to ensure that they would not be classified as “cross-border” for IORP funding purposes – the result being that very few, if any, UK occupational pension schemes are currently actually subject to the cross-border funding regime.

Meanwhile the Pensions Act 2004, the relevant parts of which implement the majority of the original IORP Directive, places domestic schemes under lower (but still onerous) funding obligations which collectively form the “statutory funding objective” or “scheme-specific funding regime”. And finally, a revised version of the Directive, IORP II, was published in the Official Journal on 23 December 2016 and must be implemented by Member States no later than 12 January 2019, albeit without the significantly-heightened funding regime based on an insurance industry style “capital adequacy” test that, until July 2016, was widely anticipated would form part of the new regime.

Protection of employment

TUPE, the Transfer of Undertakings (Protection of Employment) Regulations, which implement the Acquired Rights Directive, gives full protection of employment rights (other than relating to pensions) on a business transfer; but are themselves then subject to exceptions in relation to enhanced pension rights on redundancy and early severance, which are required (by two notable decisions of the CJEU) to be maintained following the occurrence of such a transfer.

Corporate failures

The Pension Protection Fund (PPF), established by the Pensions Act 2004 in order to give effect to the pensions-related aspects of the EU Insolvency Directive, provides compensation to members of schemes that provide defined benefits where the employers have entered administration or become insolvent. Other aspects of the UK pensions legislative framework (such as the Pensions Regulator and its anti-avoidance or “moral hazard” regime), whilst not being an explicit requirement of the EU regulatory framework, have come into being as a direct consequence of it.

Data protection

An often overlooked side-effect of our EU membership is the application of the Data Protection Act 1998, which derives from the Data Protection Directive, to controllers of personal data such as pension scheme trustees and their actuaries and administrators. Pursuant to the new EU General Data Protection Regulation a much more stringent regime will come into force in May 2018, with direct effect (and hence without any need to be transposed into domestic legislation) and will increase the obligations faced – and the risks of (much greater) regulatory sanctions run – by those who control or process personal data. See the Data Protection section above for further detail.

The general position post-Brexit

If the UK were no longer subject to these Directives, as could be the case post-Brexit (but depending ultimately on the extent to which the Government’s intended Great Repeal Bill hard-codes existing EU law into domestic UK legislation), it would in theory have more of a free hand to legislate in these areas, with the precise impact on pensions depending on the extent to which domestic legislation in these areas is altered. Retrospective change seems extremely unlikely, however, and even prospective change must be considered against the odds, whether in order to maintain the UK’s competitive edge in the IT and financial services industries (via an ability to continue trading relationships with remaining EU Member States) or due to potential political backlash in response to the removal of what are now regarded as long-standing, domestic legal cornerstones.

A lesser degree of influence from the rulings of the CJEU can however be expected, albeit predominantly on a forward-looking basis given that many of its existing judgments are now also firmly enshrined into our domestic legal system. We do however foresee some scope for change (and, in the meantime, uncertainty) where the detailed application of EU legislation has been the subject of a ruling by the CJEU not then mirrored by consequential changes to our domestic laws. By way of example, some of the finer detail of benefit equalisation; the “pensions exception” on a TUPE transfer (particularly the protection afforded to enhanced redundancy rights); and recoverability of VAT by scheme sponsors (something which continues to tax both HMRC and the pensions industry generally), would all potentially be candidates for reform once Brexit has taken place.

Pan-European pensions – something to ponder

Last of all a further specific question mark must also, we think, hang over the extent to which those occupational pension arrangements with a mixture of UK and EU members will be able to continue as such, post-Brexit. In some ways the impact can be expected to be negligible, for reasons that include the following:

  • First, very few UK occupational pension schemes are known to be operating on a cross-border basis due to the onerous funding obligations that would apply: see above.
  • Furthermore the stated policy objective of the original IORP Directive, namely a genuine internal market for occupational retirement provision, via the facilitation of EU-wide pension provision for pan-European corporations and their internationally-mobile staff, is recognised to have been hampered by both (i) that self-same cross-border funding regime for defined benefit schemes and (ii) the carve-out in the Directive which permits Member States to derogate from its over-arching requirement for an internal market if “national social and labour legislation on the organisation of pension systems” (ie any given Member State’s domestic pensions regime) would otherwise be prejudiced.

Equally, however, in certain situations we can see how our departure from the EU may have an impact that needs addressing:

  • The position of UK-based employees in overseas schemes is a case in point – how will they fare as members of an EU scheme, formerly (legitimately) operating cross-border, in a post-Brexit scenario in which UK employees may no longer have the ability under EU law to remain in membership of such an arrangement?
  • More generally, if an internal market for occupational retirement provision does develop sufficiently under the auspices of IORP II before the UK’s departure from the EU (however unlikely that may seem at the present moment), it may subsequently prove difficult to un-pick any UK-related element of that wider picture once Brexit does take place.

And finally, are there opportunities as well as challenges? Could a repeal of the (wholly unpopular) Cross-Border Regulations allow UK occupational schemes to once again admit into membership internationally-mobile employees and thereby achieve, outwith the EU, the very thing that its IORP Directives have long-striven to achieve?