Although the current legal framework which regulates UK pension schemes has been heavily impacted by EU treaties, directives and regulations, in the short term there are unlikely to be changes in legislation which will take us away from the current position.
The wider terms which the UK negotiate for its exit from the EU over the next few years will determine the impact on UK pensions legislation, including whether statutory scheme funding requirements will be diluted to the levels in place prior to the implementation of the EU IORP Directive, and the impact on equality legislation and TUPE-related pension requirements.
There are shorter term consequences of the UK's vote to leave the EU:
- The negative impact on domestic and global financial markets will have an immediate adverse impact on the value of pension scheme investments coupled with a sustained increase in market volatility.
- Consequently pension scheme funding assumptions and investment strategy will need to be closely monitored – greater diversification and other risk mitigation strategies may be required to hedge against the greater investment risk for both defined benefit and defined contribution schemes.
- An assessment will also be needed of the impact on UK Government bonds as a result of any downgrade in the UK's credit rating, and the impact on derivatives and swaps contracts of sterling depreciation and in the medium term any decision by financial institutions to relocate away from the UK.
- The negative economic consequences of Brexit will lead to weaker pension scheme employer covenants. Defined benefit scheme trustees will need to closely monitor the financial covenant of their sponsors and scheme guarantors, and where appropriate seek additional security (eg a charge over assets or a guarantee from a non UK group company).
- For defined contribution arrangements, it will be important to ensure that employer scheme contributions can still be paid.