Brexit and Pension Schemes



Brexit and Pension Schemes

A guide for employers and trustees

Action now and

watching brief for


A guide to how we

can help you

The effect of the EU referendum vote has already

made itself felt – on pension scheme investments,

the valuation of scheme liabilities and on the

ability of some employers to continue to support

their scheme.

This guide looks at what has already changed, and

what may happen in the future. We focus on what

steps employers and trustees should be taking

now, and what they should be looking out for

going forward.

Our credentials

We are a market-leading team specialising in

advising employers, trustees and providers on

pensions law. We have a wealth of experience and

know-how in relation to a large variety of pension


We are assisted by our specialists working in other

fields, such as public law, EU law and financial

services regulation. We offer a dedicated service to

clients affected by the Brexit vote.

Summary of action points

There are already a number of action points for

trustees and employers:

• Scheme employers and trustees should consider

telling members that they are monitoring the

impact of Brexit on the pension scheme

• Trustees should review, in consultation with the

employer, their integrated risk management

strategy, which may result in a revised statement

of investment principles, an employer covenant

review and a review of any contingent asset


• Trustees should review DC default fund

strategies, and remind DC members periodically

to review their investment options

• Trustees should consider counterparty default

risk and collateral arrangements on derivative

and swap contracts

• Trustees should consider reviewing discount

rates, transfer assumptions and commutation

factors (especially if a trivial commutation or

pension increase exchange is envisaged)


Pinsent Masons Brexit and Pension Schemes

Immediate impact

of Brexit on


Pension scheme investments have already been

affected by the Brexit vote. This has not

necessarily been negative. The fall in the pound

has resulted in an immediate increase in the

sterling value of overseas assets. The impact on

funding levels has varied widely across DB

schemes, depending on the investment portfolio

and the level of hedging. Reduced gilt yields inflate

liabilities, increasing deficits for DB schemes that

had not hedged against the yield reduction.

Trustees need to check whether any legal triggers

might come into play. For example, the

downgrading of UK gilts by ratings agencies could

bring them outside pre-agreed investment

guidelines. If the credit rating of a counterparty to

a derivative agreement deteriorates, termination

of the agreement could be triggered. Credit

downgrades could make it more difficult to post

collateral and require more cash to be held. An

investment strategy may include automatic

switching to gilts if investments fall below a

certain level. Awareness of all these potential

triggers is key. Trustees need to be prepared to

take action or, following due consideration, refrain

from action once a trigger has kicked in.

DB schemes – employer covenant

Trustees and employers should discuss together the

potential impact of Brexit on the employer’s ability

to fund the scheme. Trustees will be particularly

keen on this discussion if the employer exports

goods or services to the EU, or may be considering

relocating some of its business to the EU. Trustees

should also look at any contingent assets in place

and consider whether they can be relied on to the

same extent as originally anticipated.

Check for legal triggers

We can help trustees to


their collateral

arrangements and

to understand the

impact of further credit


We can help trustees

put in place information

sharing protocols with



For sector specific updates and further insights see

We can support

trustees and

employers with



exercises and can

help those wanting

to take advantage

of future buy-out


DB valuations and de-risking

Trustees should consider reviewing discount rates,

transfer assumptions and commutation factors

(especially if a trivial commutation or pension

increase exchange is envisaged). In some cases,

trustees may wish to bring forward valuations.

Increased deficits may lead some employers to

explore benefit restructuring exercises again.

If the parent company is based outside the UK,

the UK scheme’s deficit may well have dropped in

terms of the parent’s non-sterling currency.

Parents may be attracted to funding deficits more

quickly to benefit from this, especially if

combined with a benefit restructuring exercise.

Securing benefits with an annuity

Market volatility has already had an impact on the

pricing of annuities. For schemes that have

hedged against volatility, buy-out may now be

more affordable. For foreign parent companies,

the weak pound will have increased the

attractiveness of buy-out by reducing the price in

terms of the parent’s non-sterling currency.

Future volatility may present opportunities for

well prepared trustees and employers.

DC investments

Trustees should consider reviewing their DC

default fund strategy. Market volatility may

undermine DC savers’ confidence (especially

those who have just or are just about to enter

drawdown, or who may make rash investment

changes). The reduction in bond yields has led to

steep increases in annuity prices. Trustees should

consider writing to members to confirm that they

are keeping the DC default fund strategy under

review in light of Brexit. They may also wish to

review whether their ‘at retirement’ offering

remains appropriate.


Pinsent Masons Brexit and Pension Schemes

Future impact

We don’t yet know how Brexit will pan out. The

formal trigger for the start of the Brexit process

is expected in early 2017. It will then be at least

two years before the UK formally leaves the EU.

The possibility of a second vote cannot be ruled

out. We do not yet know how much EU law the

UK government may wish, or will be forced, to

retain. We consider below what may be in the

offing in a number of different areas.


The UK could decide to legislate for the removal

of the requirements for GMP equalisation and

for gender-neutral annuities. It may wish to

simplify our current complex age discrimination

legislation. Some schemes may consider

postponing winding-up in the hope that GMP

equalisation will no longer be required.

Keep a watching brief

on developments

GMP equalisation

could go away

We urge the government to treat the problem

of GMP equalisation as a priority. The cost of

GMP equalisation has been estimated at

between £13bn and £20bn. Often, it is rearranging

deckchairs on a sinking ship.

Funding regime

The UK may need to implement the new

directive on the activities and supervision of

institutions for occupational retirement

provision (IORP II) before it can implement

Brexit. That directive would not be particularly

onerous for the UK – it deals with governance

and not funding. If the UK stays in the European

Economic Area, then the risk remains that a

future IORP directive could bring a stringent

new solvency requirement for DB schemes.

IORP II Directive

may need to be


The Pensions Regulator’s integrated risk

management (IRM) model was inspired by

proposals by the European Insurance and

Occupational Pensions Authority (EIOPA).

Whilst this model could be dropped, some form

of risk management model is inevitable.


For sector specific updates and further insights see

Business transfers

The UK government might relax the

requirements for a buyer to replicate the

employment terms a seller had in place before a

business is sold. Currently, certain early

retirement benefits provided under an

occupational pension scheme transfer to the

buyer’s employees.

Removing these requirements could form part of

a cutting red tape/encouraging business agenda.

Data protection

Much will depend on what relationship the UK

retains with the EU. Even if the UK leaves the

European Economic Area, it may still choose to

implement the EU General Data Protection

Regulation (currently in draft). This would ensure

that personal data could continue to be sent

from the UK to the EU. Whatever happens, the

basic principles of data protection and security

will remain.


The UK might relax the restrictions that

currently apply to the investment by an

occupational pension scheme in assets that

relate to the employer.

However, to protect scheme members, and the

Pension Protection Fund, we expect self

investment will continue to be restricted in

most cases.

Overseas contracts and


Depending on the result of the Brexit

negotiations, it may become more difficult to

enforce UK contracts and judgments in the EU.

This could affect guarantees given by overseas

parents, and contracts with overseas third-party

administrators and managers – and would also

have implications for the enforceability of the

Regulator’s moral hazard powers within the EU.

Guarantees given

by overseas parents

and contracts with



may be affected


Pinsent Masons Brexit and Pension Schemes


HM Treasury may be able to write its own rules

for VAT, which is an EU tax. It may well legislate

to clarify the extent to which employers can

recover VAT on pension costs - an area currently

rife with uncertainty.

Reducing accrued rights

Reducing accrued pension rights is fraught with

difficulty. The government has recently held back

from reducing inflation protection for the Tata

Steel pension scheme. One of the objections

sometimes raised is that such reductions would

be unlawful under EU law. Brexit may mean that

the government is more willing to introduce

greater flexibility into the system.

Pension Protection Fund

The PPF is partly designed to meet the

government’s obligations under EU law. Brexit

would give the government a free hand over how

the level of PPF compensation is determined.

Whilst we expect the PPF would carry on as it is,

at least in the short term, Brexit would reduce

the risk of the PPF having to increase

compensation levels in the future.


Scottish independence would add another raft of


Many (in what would remain of the) UK schemes

may then operate on a cross-border basis. What

would this mean for funding, the PPF etc? The

legality of some asset-backed funding

arrangements, which rely on Scotland being part

of the UK, would also be called into question.

If Brexit leads to

Scoxit, we’ll be

writing another


Next steps

If you wish to find out more about how we can help you prepare for the challenges and

opportunities triggered by Brexit, please contact your usual Pinsent Masons’ adviser or:

Carolyn Saunders

Head of Pensions and Lifetime Savings

T: +44 20 7418 7141



This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.

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