In the short term, Brexit is unlikely to have a significant impact on the legal and regulatory framework for UK pension plans. However, it does open the door for UK legislation to deviate from EU requirements in the future (for example, in relation to funding, investment and plan governance). Furthermore, without the influence of the CJEU in the background, UK case law on matters previously the preserve of the EU, such as equal treatment and TUPE, may start to take its own domestic direction.
Any political fallout from the EU referendum could also have a major impact on the future shape and direction of UK pensions policy. However, we assume that the UK – whatever the colour of its politics – will probably choose to formally distance itself from certain EU originated policies which never fitted very well with the UK pensions system, including solvency funding and GMP equalisation. It also goes without saying that the IORP II Directive – likely to emerge shortly from the EU Trialogue process and which contains new requirements on plan governance and member communications – is very unlikely to be enacted into UK legislation.
In the more immediate future, there is likely to be considerable investment volatility – which could present both risks and opportunities for pension plan trustees and corporate sponsors. The position will need to be monitored carefully, and trustees in particular will need to consider quickly whether their plan's investment portfolio remains appropriate for a post-Brexit world. Plan investments governed by the laws of another Member State or contingent assets based in the EU will need particularly close attention to ensure they remain appropriate and enforceable.
The macro-economic impact of Brexit and its impact on individual businesses is difficult to predict with certainty as it is likely to be determined, to a large extent, by the nature of the UK’s ongoing relationship with the EU as well as any trade deals that the UK enters into with countries outside of the EU (such as the US and China). Trustees of defined benefit pension plans need to be alive to any deterioration in the financial strength of the business standing behind their plan and corporate sponsors need to be prepared to address trustees’ concerns in this regard.
The most pressing action points for corporate pension plan sponsors and trustees as a result of the EU referendum are likely to be:
- corporate sponsors should assess the potential impact of Brexit on their business and on their pension plan and prepare contingency plans for this. They should also be ready to provide reassurance on this to the trustees of their pension plan – particularly as regards the covenant backing the pension plan;
- trustees should consider the suitability of their post-Brexit portfolio and what steps they can take to mitigate the impact of continued volatility on investment markets on their plan. They should also reassess the strength of the financial covenant standing behind their plan in light of Brexit (including any contingent security granted to the plan) and take steps to mitigate the risk of any material weakening in this. Plan assets (including contingent assets) linked or subject to the jurisdiction of another EU Member State should be reviewed particularly closely; and
- trustees and corporate sponsors should also consider the need to send a communication to plan members to reassure them about the steps that they are taking to mitigate any risks to the plan arising as a result of Brexit.