If Brexit affects the UK’s access to the free market, employers will need to consider its impact on access to investment opportunities and overseas service providers.
The impact of Brexit on UK growth, investment performance, the strength of the pound and interest and gilt rates will impact on pension scheme investments, and therefore scheme funding positions.
Pan-European pension funds
The IORP I Directive 2003/41 allowed the setting-up of cross-border pension funds within the European Union. It is unlikely that this regime will disappear post-Brexit, although the Government’s consultation on the security and sustainability of defined benefit pension schemes which closed in March 2017 may well lead to change in this area.
On 23 December 2016, the IORP II Directive 2016/2341 (updating the IORP I Directive) was published in the Official Journal of the European Union. The IORP II Directive must be implemented at the latest by 13 January 2019. Taking into account the Brexit timing, it is still to be seen whether or not the UK will implement the IORP II Directive prior to leaving the EU.
Brexit may have an impact on UK-based pension funds managing pension plans in the EU and on EU-based pension funds managing pension plans in the UK. It will have to be verified under which conditions these pension funds will be able to continue their cross-border activities or whether the sponsoring employers will have to find other solutions.
Pan-European Pension Funds will also have to verify their commercial contracts with UK service providers such as their asset managers.
Other EU Directives
Aside from IORP I, EU Directives are the basis for a number of pension-related rights, including the protection of enhanced pensions rights on redundancy and early severance following a business transfer (TUPE), and the Pension Protection Fund, which provides compensation to members of defined benefit pension schemes where the employer becomes insolvent. It is unclear whether or how the UK might seek to change these regimes following Brexit.
- Keep a close watch on the negotiation process and future changes in (international) employment/social security/pensions legislation and be prepared to respond swiftly to any developments.
- Keep valuations and investment strategies under active review.
- Map your expat workforce and prepare the post-Brexit reality in relation to pensions.
- Review cross-border employment (expat-secondment) contracts between the EU and the UK.
- Check commercial contracts with UK service providers.
- Maintain clear and consistent communications with scheme members.
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