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Pensions briefing - Brexit and Pensions Issues

Publication April 2016


The referendum on European Union (EU) membership will be held on Thursday 23 June. The question voters will be asked is “Should the United Kingdom remain a member of the European Union or leave the European Union?”

This briefing looks at some of the issues for pension schemes in the run-up to the referendum and in the event of a vote to leave the EU.


If the UK votes “leave”, the UK Government will need to decide on the structure of the UK’s future relationship with the EU. The consequences of the UK leaving the EU will vary depending on what type of relationship the UK seeks to establish with the EU. There are various options which are broadly as follows:

  • European Economic Area (EEA) and the European Free Trade Association
    The UK could seek to join the EEA and the European Free Trade Association. In this scenario, the UK would continue to have unrestricted access to the EU market. However, the UK would have to comply with EU regulations and it would still have to allow the free movement of persons, goods and services. The UK would not have a say in creating EU legislation and would therefore not have any influence over making the regulations which it would nevertheless have to adopt.  
  • Customs Union
    The UK could enter into a customs union with the EU, which would enable the UK to continue to export goods to the EU without being subject to tariffs or customs restrictions. The UK would still be subject to some aspects of EU trade policy and it is likely that the customs union would apply only to specified industry sectors.
  • Trade Agreements
    The UK could agree sector-specific trade agreements with the EU. The UK’s access to each sector of the EU market would depend on the UK negotiating a separate agreement in relation to that sector, and therefore it is likely that the UK would not have unrestricted access to the whole EU market.
  • Free Trade Agreement
    The UK could agree a single free trade agreement with the EU (rather than negotiating a series of sector-specific agreements.)
  • World Trade Organisation Rules
    The UK could decide not to negotiate a deal with the EU and could rely on existing World Trade Organisation Rules. This scenario would allow the UK to have full control over its trade policy, but it would have to pay import tariffs on all goods exported to the EU and would have to comply with any other restrictions imposed by the EU.

A “leave” vote: the possible effect on the UK statutory framework

Areas unlikely to change

If the UK leaves the EU, the UK Government would not be under an obligation to retain any legislation derived from EU law. However, any UK primary legislation which has implemented EU law will not automatically fall away. For example, the provisions of the Pensions Act 2004 relating to scheme-specific funding and the Equality Act 2010 relating to discrimination would remain in force, unless and until the Government decided to repeal or re-write them. It is likely that it would take the Government years to work through all EU-derived primary legislation to decide which parts to retain and which to repeal.

Practically, it seems unlikely that the UK Government would decide to repeal the relevant provisions of the Equality Act 2010. In addition, the scheme-funding regime under the Pensions Act 2004 is well-established and is generally accepted to be more effective than the previous minimum funding requirement regime at reflecting the actual funding position of defined benefit schemes.

In addition, if the UK left the EU but negotiated, for example, to join the EEA, it would have to continue to comply with certain EU standards and requirements. These are likely to include much of EU-derived employment law and possibly other areas, such as data protection and the cross-border pension scheme requirements.

Areas of change

If the UK leaves the EU, the European Court of Justice would no longer have jurisdiction over the UK courts, and UK legislation would no longer need to be interpreted in the context of EU law. In addition, even if in the short-term the UK Government decided to retain much of EU-derived legislation, over the long-term, there would be greater flexibility for UK legislation and case law to diverge from EU law.

Future changes which are being proposed by the EU which would affect UK pension schemes are likely to fall away. For example, it is possible that UK pension schemes may not be required to equalise guaranteed minimum pensions (the Government’s view being that it is EU law which drives the requirement to equalise), and the new disclosure, governance and risk assessment obligations which are being proposed by the IORP II Directive, which is expected to be finalised later this year, would not apply to UK schemes.  

Some considerations for pension scheme trustees

There could be market volatility in the run-up to the referendum. If the UK votes to leave the EU, there may be a substantial shock to the UK economy. In light of this, trustees may wish to consider the following points.

  • If a defined benefit pension scheme has a funding valuation or its accounting date during the next two months (in the run-up to the referendum), this could be affected by the uncertain market conditions. This would also be the case if market conditions were affected immediately following a vote to leave the EU. Trustees and sponsoring employers should monitor the market situation, but there are very limited circumstances in which it would be possible to postpone the valuation or accounting date.
  • Trustees should monitor the risk that uncertain market conditions pose to the financial stability of their scheme’s employer and should consider seeking additional security if the employer’s ability to fund the scheme appears to be significantly affected.
  • Trustees may wish to consider, in consultation with their investment advisers, reviewing their investment strategy in light of the potential market volatility.
  • In the event that there is a significant impact on the economy, trustees may decide to consider how their schemes’ hedging arrangements might be affected if corporate issuers had their credit-ratings downgraded (which could affect the value of any collateral posted by schemes).
  • If financial institutions are detrimentally affected by market conditions, trustees may wish to examine how exposed they are to particular financial institutions as counterparties to swap transactions.
  • If the UK Government’s borrowing costs increase as a result of the UK leaving the EU, trustees may wish to monitor the price of gilts and, if these decrease, consult with their investment advisers about the possibility of de-risking by investing to replace shares with gilts.
  • It is predicted that some financial institutions which are currently headquartered in the UK may decide to re-locate outside the UK. If this occurs, and if the financial institutions are counterparties to hedging arrangements with pension schemes, the trustees of these schemes may wish to review their documentation and seek advice as to whether the documentation needs to be revised.


There is a great deal of uncertainty about the consequences of a vote to leave the EU and there are clearly areas of concern for trustees (and scheme sponsors). However, despite this, there are proactive steps which trustees can take to establish what the effects on their schemes might be in particular scenarios. Trustees should be alert to the possibility of changing market conditions over the next two months in the run-up to the referendum. They can also look at the risks which a vote to leave the EU may pose to their schemes and seek to prepare themselves if these risks materialise.

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