Posts Tagged ‘Brexit’

John Wilson

Brexit – what happens next?

If you stayed up late on 31 January you would have witnessed the UK finally leaving the EU. A moment of history, indeed, but right now it may feel that not much has changed.

The Withdrawal Agreement (WA) came into force immediately, but several features of UK membership of the EU will be maintained during the so-called ‘transition period’ provided for by the WA (technically, this is not a transition period but rather a period of negotiation over a trade deal).

The legal basis for negotiations between the UK and EU will now be based on the same procedures applied for negotiations with other ‘third countries’ (under Article 218 of the Treaty on the Functioning of the EU).

The ‘transition’ period has been devised as ‘breathing space’ for the UK and the EU to try and negotiate a new relationship. It will last only until the end of this year (31 December 2020); theoretically, it could be extended but the UK Government has legislated to stop itself from seeking an extension.

For the remainder of 2020:

  • most EU rules will continue to apply to the UK;
  • the UK will still be part of the EU single market and customs union;
  • existing trade arrangements and rules for travelling within the EU will continue to apply;
  • the jurisdiction of the Court of Justice of the EU will continue as before; and
  • the UK will continue to pay into the EU budget.

The UK, however, can no longer take part in EU decision-making and is no longer represented in the EU institutions. UK representatives can participate in meetings of EU bodies where discussions are relevant to the UK, but they will not have a vote.

There are other arrangements that cease to apply straight away too; for example, UK citizens resident in EU Member States will lose the right to vote and stand in local and European elections.

Also, the EU will be able to exclude the UK from EU activities where participation would grant the UK access to certain security-related sensitive information. However, the EU Common Foreign and Security Policy will continue to apply to the UK.

The EU’s international agreements still apply to the UK during the transition period, but the UK is now permitted to negotiate and ratify new international agreements with non-EU countries provided that these do not come into force before the end of the transition period.

Beyond transition


As things stand, the above arrangements will end on 31 December 2020, but with some areas of the UK-EU relationship still covered by the WA, including rights of EU citizens living in the UK and UK citizens living in the EU at the end of the transition period; together with aspects of Northern Ireland’s relationship with the EU.

The nature of arrangements for other aspects of UK-EU relationship will depend on what is agreed in the next 322 days (sounds like a lot of time, but remember how long it took to get to this point!).

From a financial services perspective, subject to the planned UK / EU free trade agreement being successfully negotiated (and covering financial services in line with political declaration), the prospective arrangements will entail:

  • the free trade agreement;
  • the regulatory regime (largely) of the ‘host’ state;
  • benefits of any EU/UK ‘equivalence’ decisions; and
  • measures, if any, to smooth the impact of exit from the single market.
KEY POINTS FOR SPONSORS AND TRUSTEES
Most EU pensions law has already been incorporated into UK legislation and any changes will require further UK legislation, and the appropriate Parliamentary processes that precede it.
In the meantime, any concerns over investment strategy, sponsoring employer covenant and the resultant impact for scheme funding should be monitored as part of a scheme’s ‘integrated risk management’ (IRM).

Want to know more?


This blog is based on a Commons Library Insight article. For more comprehensive information, click on the links below.

John Wilson

B-Day has (almost) arrived

It has been nearly three years since the then Prime Minister gave the European Council formal notice of the UK’s intention to leave the EU.

We are all familiar with key events that have unfolded since then, not least the acrimony, polarisation of society and ugly scenes in the UK Parliament all of which were comprehensively covered by television, radio, newspapers and social media.

However, all said and done, it now looks as though Brexit will actually happen and that the UK will subsequently cease to be a EU member state.

Assuming that a ‘no-deal’ Brexit is avoided, a post-Brexit transition period will run from exit day until 31 December 2020, and could be further extended. During that period, most EU law will continue to apply to the UK and so it will look as feel, in many regards, as though the UK is still part of the EU.

The Withdrawal Agreement Bill has now been approved by Parliament and the Queen and has been signed by the EU Commission and Council; the European Parliament is expected to vote for it on Wednesday 29 January. It will amend the European Union (Withdrawal) Act 2018 (EUWA) to save the effect of most of the European Communities Act 1972 for the duration of the transition period, and will create the new body of retained EU law at the end of the transition period.

At the end of the transition period, the withdrawal agreement will address the future UK-EU relationship.

If the event of the UK and EU failing to conclude a withdrawal agreement, the UK will still leave the EU. However it will do so without an agreement or a transition period. EU law will stop applying to the UK on exit day.

In either scenario, what are the short-term implications for pensions?

The answer, at least from a legal perspective, is ‘not much’.

Most EU pensions law has already been incorporated into UK legislation and any changes will require further UK legislation, and the appropriate Parliamentary processes that precede it.

We may, over time, see divergence between UK and EU pensions law but, except perhaps for those few employers operating cross-border pension schemes, legally it will be business as usual.

There is less certainty from the perspectives of pension scheme investments and employer covenants.

Financial and economic volatility, the degree of which could be dependent on how the UK leaves the EU (see above), could be a major issue, but will be very scheme specific. Investment strategy, sponsoring employer covenant and the resultant impact for scheme funding should be considered as part of a scheme’s ‘integrated risk management’ (IRM).

Finally, some thought may also need to be given to operational issues where, for example, schemes pay pensions to EU ex-pats after the UK ceases to be a member state. The expectation, however, is that these pensioners will continue to receive their retirement incomes without interruption.

In the meantime, The Pensions Regulator has set out the areas it expects trustees to focus on in order to prepare their schemes for Brexit and all trustees should be familiar with this guidance:

James Geen

Brexit. The fog of uncertainty. Political claims and counterclaims. Arguments between those with rose tinted glasses (both on the remain and leave sides of the argument) on what the Brexit outcome might be. Cutting through this there is a fundamental question. What, at the end of the day, does a pensioner living abroad have pretty high on his or her wish list? I might put a small wager that continuing to get their pension paid is not a bad guess at the answer.

So, what are the issues around pension payments?

Government alerts have flagged possible difficulties in making payments to EU based pensioners on Brexit, following the loss of access to the EU ‘passporting regime’.

As far as trustees are concerned, loss of access to the regime means that they face uncertainties over how payments will be made, potential delays in payments and increased costs of such payments. These issues need to be thought about by Trustees when considering the risks to the scheme and have been highlighted in the Government’s economic analysis.

If the payroll costs of paying EU based pensioners increases, then trustees will also need to consider who will meet the cost of these additional charges, the Scheme or the Member.

A further concern is an increase to the processing time and the potential issue of difficulties of EU based pensioners relying on a UK based bank account for accessing their funds.

So, with this in mind, what do trustees or administrators say to pensioners when they ask that very relevant question, will my pension payments be affected? To date, our experience is that Brexit has not created a rush of phone calls from pensioners living in the EU worried about their pension payments but, as we head towards 29 March 2019 and there is clarity over what might, or might not happen, being prepared for the question is important.

Perhaps saying nothing, or we don’t know, is the answer. However, given warnings from the Government on potential difficulties in making payments to EU member states, whether or not trustees decide it is appropriate to communicate with pensioners at this stage, they should at least consider the issue and have something in the back pocket. At least they will be prepared to explain why it is difficult to give a definitive answer. It may not be an answer that gives a lot of comfort, but it is an honest assessment of the situation.

A consideration, for trustees is whether there is sufficient information to add value to their pensioners by a wider communication now, or whether a communication should be delayed until they have more certainty on the issues. Whatever trustees decide, they should prepare a list of potentially affected members, so they are in a position to communicate quickly, if they decide to communicate with these members.

Angela Burns

At the time of writing, on 29 March 2019 the UK will exit the European Union with or without a deal.

It is not possible to guess what will happen in the coming months and how markets will react. For Trustees with defined benefit pension schemes it’s an uncertain time.

The risks that Brexit poses are not new – they are the same risks that pension schemes face every day. Brexit just provides an increased chance of unlikely events.

So how should Trustees prepare?

In December 2015 the Pensions Regulator introduced guidance for Integrated Risk Management confirming that Trustees should consider risk at a holistic level. The three main areas of risk are ‘Funding’, ‘Covenant’ and ‘Investment’. Trustees should consider the main risks faced by the scheme across all three areas and more importantly how they interact. Trustees should also have in place contingency plans setting out actions that will be undertaken to limit the impact of risks should they materialise.

Brexit is effectively a ‘test’ of how well Trustees have implemented the Pensions Regulator’s proposals. A Trustee board with a robust IRM framework will be well placed to deal proactively with risks as they emerge.

It is important during times of volatility that Trustees have access to timely and accurate information to make quick, informed decisions. Trustees should ensure that their advisors are well placed to provide regular information in the lead up to, and after the 29 March 2019. Any delays in information provision will add to risk exposure.

Trustees should also have access to scenario analysis tools to determine the impact of certain events – for example a 1% p.a. fall in gilt yields. This will allow the Trustees to specify more robust and accurate actions when considering contingency plans.

Trustees with valuation dates on or around 29 March 2019 should consider the potential impact of this and may decide that the valuation date should be moved. In my view, there is sufficient flexibility in the funding regime to take a long term view on funding, and taking a snap shot of the funding position at a single point in time should not drive funding decisions.

In times of volatility, Trustees should monitor transfer value requests and any other member events where actuarial factors are used. If, for example, extremely low gilt yields result in high transfer values, the Trustees may choose to delay the provision of transfer values to see if the low gilt yield environment persists.

Trustees should also consider any employer exercises offering member options and when these options may be exercised.

Trustees may wish to disinvest funds in advance to allow for any ‘known’ payments on or around March to avoid disinvesting in inopportune conditions.

From an actuarial perspective planning is key, and a good IRM framework should result in quicker decision making.

Mike Crowe

I am sure that with the many aspects of Brexit that are occupying the minds of businesses around the country the impact on the company pension scheme might not be high up on the list for the sponsoring employer. Whilst I have every sympathy for this view it would be remiss of me not to suggest that companies don’t lose sight of this and to engage with their trustees for whom this is a very real issue.

Let me start with a question. If you asked your trustees what was the top risk on their scheme risk register what would they say? If it is not “Brexit” then ask them again until they get the right answer. (Yes, I gave you a hint there.) The current economic uncertainty caused by Brexit highlights the need for an effective integrated risk management framework for pension schemes. It is important that your trustees understand the risks that the scheme faces and that they are actively engaging with you. Effective contingency planning is key and that planning is needed now.

But, as the events of November 2018 have shown, no one knows what 29 March 2019 will bring or indeed who will be leading the discussions, so how can I plan? Will there be a deal? If there is a deal what will it look like – a hard Brexit, a soft Brexit or something in between? Maybe no Brexit at all? Will the date or the transition period be extended? All valid points, but, as I was always told, you hope for the best but prepare for the worst. So with that in mind what do you need to discuss with the trustees?

Employer Covenant

The impact that Brexit will have on the business of a sponsoring employer is critically important to the trustees. Conversations should be taking place so that trustees and their covenant advisers can understand the impact on the sponsoring employers business prospects given the uncertain economic climate and potential shifts in currency or other markets  which may impact on their support for schemes – either in terms of DB funding or contributions to DC pots. This is something that you will be very aware of for your business and open and honest dialogue with your trustees will allow them to effectively assess risk and plan.

Actuarial Assumptions

The impact of Brexit should be taken into account in setting assumptions for actuarial valuations and agreeing recovery plans. To enable the trustees to assess the impact on planned contributions to the scheme, they need to understand the impact of Brexit negotiation outcomes on the cashflows of the business.

The funding levels of DB schemes need to be reviewed as continuing low interest rates and quantitative easing means DB liabilities remain high. New market conditions will raise questions about whether the scheme’s valuation is still current. The funding level and the associated risk it poses to the employer needs to be considered and ways of mitigating this risk need to be discussed.

Buy out prices for DB schemes may be more attractive and trustees may be checking with the scheme’s advisers whether now is the time to remove some risk from the scheme.

For a sponsoring employer this is all relevant and relevant now. Being an active part of the process is crucial not just for the scheme but for your business too.

Investments

Trustees will need to consider whether the scheme’s investment strategy is still appropriate for current market conditions and take advice from their investment advisers. For a DC scheme, they will need to check to see if the default fund is suitably diversified so as to protect members from any shock to the UK or European economy. A check should be carried out to see whether there has been an impact on the value of collateral that the scheme posts or receives under derivative contracts. The scheme might need to post extra margin, or ask their counterparties to do so.

It will be some time before there is clarity on how Brexit affects schemes’ investments, contingent assets and investment yields in other countries – both EU and non EU. Trustees need to keep this under review.

Trustees will also need to check that their fund managers have a Brexit plan. They should.

Scheme members may well be worried about security of their pensions in the run up to 29 March 2019 and beyond.  It is imperative that you and the trustees prepare for whatever 29 March 2019 brings. As far as you can, protect the scheme and the members from the impact of Brexit. Communication will be key both with your trustees and your employees to manage the uncertainty that Brexit

Alan Collins

2016 – A year in review

Wow – what a year 2016 has been.  Brexit, President Trump, Hibs winning the Scottish Cup – who saw that coming?  Seriously, Hibs won the Scottish Cup.

What have we learned?  The dictionary definition of “pollster” might have to change to “people who predict things and always get it wrong”, said the actuary throwing stones from his glass-house.  My lesson to the pollsters is to quote a much bigger margin of error and include lots of caveats.

At least when it comes to 2017, it is now a reasonable stance to say that I’ve got no idea what’s going to happen. Read more »

Andrew Kerrin

One thing you can be sure of is that there is no shortage of pension updates hitting your inbox on an almost daily basis – updates we don’t always get round to reading.  Here at Spence we like to be helpful so to save you time, the team have scoured the news and developments which have impacted the pensions world in the last quarter and produced an update of the most topical, newsworthy and essential matters that you need to see to keep you updated and informed.

This quarters highlights include

  • 5 investment questions to ask post Brexit.
  • We are still  in Europe so how does this affect risk assessment frameworks?
  • Gilt yields have been detrimentally effected by Brexit but what does this mean for transfer values and funding?
  • We explain HMRC’s latest announcement on VAT and pension schemes.
  • What’s been happening with the Pensions Ombudsman and in the Court?
  • Governance has been tightened up for DC Schemes.  We explain how.

Read more »

Rachel Graham

The result of the EU referendum on 23 June 2016 was a surprise for many of us. It was difficult to predict the detrimental impact on gilt yields which occurred in the weeks following the result! With many UK pension schemes invested in gilts, the historically low gilt yields which resulted has led to pension schemes being faced with significantly higher liabilities. Transfer values for deferred members of DB schemes have also increased. A transfer value is a best estimate of the cost of providing the benefits to the member in the scheme and these too are calculated with reference to gilt yields.

Trustees may be concerned if their scheme experiences an increase in transfer value requests post Brexit. Trustees are ultimately responsible for the security of benefits of ALL members- those who wish to transfer and those who remain in the scheme. Read more »

Matthew Leathem

The past few weeks have seen many interesting changes in investment markets as they attempt to find a new level following Brexit. Pension Schemes should take this into account when reviewing their funding and investment strategies. In some cases it may be worthwhile to expedite your investment review, although as pointed out by my colleagues, this will only be in exceptional circumstances as pension scheme investments will be based over a very long horizon.

We will look at some of the major changes that have happened to markets since the EU referendum, consider how these will impact Defined Benefit (“DB”) schemes and provide ideas to help manage risks caused by the resulting market volatility over the coming months. Read more »

Neil Buchanan

The UK has made its choice, and has voted to leave the EU. What does that mean today for occupational pension schemes? In the wake of the result on 23 June 2016, significant market volatility ensued. With the yields on UK Government bonds falling, the majority of schemes will have experienced an increase in liabilities. However, the impact on funding will depend on a scheme’s investment strategy.

We therefore posed some of the questions which you may want answered to our own Chief Investment Officer, Simon Cohen. Read more »

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