For many, the issue of Brexit has taken a back-seat due to the all-consuming effects of the COVID-19 pandemic. However, as the end of the transition period nears, trustees need to re-focus their attention on this issue and the potential effects on pension schemes.
The UK formally left the EU on January 31, 2020. However, the transition period runs until December 31, 2020, and during this period, the situation for many pension scheme trustees has remained broadly unchanged. The UK government and the EU are still in negotiations about a trade deal which would govern the UK’s relationship with the EU after December 31, 2020, and avoid the scenario of a no-deal Brexit.
The effect of Brexit on UK pension schemes
Much of UK pensions legislation is derived from EU Directives or CJEU decisions, particularly in relation to equality and final salary scheme funding. The UK statutory instruments which affect these requirements will broadly remain unchanged following the end of the transition period. For example, Section 62 of the Pensions Act 1995, which included an equal treatment rule in occupational pension schemes, and the provisions of the Equality Act 2010, which govern how schemes treat surviving civil partners and same sex spouses, will remain in effect and it is not expected that any of this legislation will be changed or repealed immediately following December 31, 2020. These areas of pensions legislation are well-established and it seems unlikely that there would be the political desire to make any changes in the immediate future.
However, there may be some changes and divergence from EU law over time. Theoretically the UK government could repeal some legislative requirements. In addition, any future decisions by the CJEU will not be binding on the UK courts (although the courts may have regard to such decisions if the decisions are “relevant”).
In relation to past CJEU decisions on these issues, the European Union (Withdrawal) Act 2018 (the “EU(W)A 2018”) gives the Supreme Court the authority to depart from past decisions, where it considers it appropriate to do so. The EU(W)A 2018 also gives the UK government the power to make regulations to allow lower courts and tribunals to depart from past CJEU decisions. The government issued a consultation on these regulation-making powers which closed in August 2020. The current proposal is to allow either the Court of Appeal or the Court of Appeal and the High Court to depart from previous CJEU decisions where they consider it appropriate. The government has not yet published the result of this consultation. If lower courts are given the power to depart from previous CJEU decisions, this may speed up the rate at which UK law in general, including in relation to pensions, diverges from EU law.
To take an example, it was following the CJEU’s decision in Barber v Guardian Royal Exchange on May 17, 1990, that pension schemes were required to equalise the retirement age for men and women from that date. This requirement was implemented in UK law by Section 62 of the Pensions Act 1995 which meant that occupational pension schemes were deemed to include an equal treatment rule. It is possible, although unlikely, that the UK government could repeal Section 62. What is more likely is that the UK courts’ interpretation of Section 62 may diverge from EU case law over time, as future decisions will not be subject to the jurisdiction of the CJEU and some UK courts will also be able to depart from previous CJEU decisions on this issue.
It is currently unclear what the position will be for cross-border schemes after December 31, 2020. If there is no trade deal between the UK and the EU at the end of the transition period, the current legislation governing cross-border schemes will cease to apply. The Pensions Regulator (“TPR”) has published guidance for cross-border schemes in the event of this “no-deal” scenario. TPR has said that, in a no-deal scenario, it expects all employers to be compliant with the guidance as soon as is practical after the end of the transition period.
TPR estimates that there are only about 40 schemes which operate cross-border between the UK and another member state. Trustees of these schemes will need to pay close attention to developments over the next few months and be ready to implement the necessary changes in the event of either a “no-deal” scenario or where the EU and UK reach a trade deal.
Practical issues for trustees to consider
The most important step trustees can take is to start talking to their advisers about the likely implications for their schemes once the transition period ends on December 31, 2020. Below are some selected areas which trustees should be thinking about now to ensure that their schemes continue to run smoothly after the end of the transition period.
It is possible that there may be market volatility over the next couple of months as the end of the transition period approaches and there is still uncertainty about the UK’s future relationship with the EU. The Pensions Regulator advises trustees of defined benefit schemes to try to avoid “knee-jerk decisions” in response to changes in asset values; pension schemes are long-term investments and trustees should not be overly fixated on short-term market movements. That said, trustees should be speaking to their investment advisers about the overall investment strategies and any risks to scheme investments and mitigations which trustees could be taking in relation to the end of the transition period.
Trustees should also check whether any funds which they are invested in are domiciled in EU countries and if so, they should discuss the implications of the end of the transition period with their investment advisers. The UK temporary permissions regime and the memoranda of understanding between the Financial Conduct Authority and the European Securities and Markets Authority and EU regulators, which will come into effect at the end of the transition period, aim to ensure a relatively smooth transition in this area after December 31, 2020. However, we would advise that trustees engage early with their investment advisers to ensure that there will not be any operational issues arising in relation to their EU investment funds after the end of the transition period.
The impact of the end of the transition period on employer covenant will depend on the industry which the employer is in and the outcome of the negotiations between the UK and the EU and the impact on the employer’s particular business. Trustees should speak to their covenant adviser about the likely impact on their employer covenant, and if they have concerns, should start a dialogue with the employer about future contribution payments and any expected changes to these.
Trustees should review their contracts with administrators, actuaries and other third party service providers to understand whether any changes may need to be made from December 31, 2020. Data protection is an area which may need to be considered in a number of contracts; after December 31, 2020, the UK will no longer be a member of the EEA and this may impact data sharing provisions in existing contracts. Trustees should also ensure that overseas service providers, for example, investment managers, have the necessary authorisations to provide the services after the end of the transition period.
Guarantees from EU 27 companies
Trustees should review any guarantees that have been made in support of their schemes by EU 27 companies. There are no restrictions on EU 27 (or indeed any overseas) companies giving a guarantee in favour of a UK pension scheme, and we consider this position is unlikely to be affected after December 31, 2020. However, trustees should give consideration to issues of enforcement and jurisdiction which may change after the end of the transition period.
When renewing insurance policies where the policy will include a time period after the end of the transition period, trustees should confirm that the insurer they choose has the necessary authorisations and processes in place to continue to provide cover for the insured risks even after the end of the transition period.
Paying benefits to overseas members
A number of large banks have started notifying customers that they will be closing overseas bank accounts in certain European countries, because of changes to the passporting arrangements after the end of the transition period. If trustees pay benefits to accounts in European countries, it is worth considering what steps trustees should take to ensure that they can continue to pay the benefits after the end of the transition period.
Trustees should prepare for members to contact them with queries and concerns about how the end of the transition period will impact their pension savings. This may be particularly relevant for schemes which have members who are resident in the EU. Trustees should speak with their advisers and administrators to ensure that they are prepared to respond to members’ questions.
Finally, in relation to any key personnel from the EU, the EEA or Switzerland who are resident in the UK, it is likely that they will already have applied to the EU settlement scheme, if applicable. The deadline for applying is June 31, 2021, but it is strongly advisable to apply as soon as possible and it may be worth checking that any key personnel have made the application already and that it is progressing smoothly (or that they have alternative arrangements in place).
Although the end of the transition period is getting closer, there is still uncertainty about the UK’s future relationship with the EU. However, there are concrete steps which trustees should be taking to prepare for the likely outcomes. Most importantly, trustees should start talking to their advisers and investment managers as soon as possible about preparations and contingency plans for their schemes which may need to be put in place from December 31, 2020.