Brexit – a pensions stocktake one week on
The result of the referendum on the UK’s membership of the EU was Leave 51.9% and Remain 48.1%. Now that nearly a week has passed since the most important domestic political development since 1945, we thought it worth taking stock. We are in uncharted waters and events are moving swiftly, but we try to summarise the main themes below insofar as they impact the UK pension scene.
The main practical considerations for UK pension trustees include assessing, urgently in some cases, the impact on sponsor covenant, where the sponsor operates in a sector which may be adversely affected by Brexit. Trustees who hold a contingent asset should also assess the Brexit impact on its value.
There has been (and may continue to be) market volatility, affecting both the asset and liability sides of DB scheme balance sheets. We have seen record low gilt yields this week as well as significant volatility in equity markets and falls in sterling.
We are in for a period of political instability. The Prime Minister has announced his resignation and the opposition is in turmoil. We may well not have a new Prime Minister until September and there could be an early General Election. We know that Royal Assent for this year’s Finance Bill is delayed until the autumn. It is not beyond the bounds of possibility that an early General Election could see a number of the Bill’s measures jettisoned ahead of dissolution – including some of those in the pensions taxation space intended to have retrospective effect from 6 April 2016.
It seems unlikely that we will see much in the way of “routine” pensions work from the DWP, HMRC and Treasury over the next few months, but it is summer, when government output is traditionally slow anyway.
While there is inevitably speculation about Parliament ignoring the vote or holding a second referendum, it seems wise (for this week at least) to plan on the assumption that we are heading out of the EU. So what might the impact of Brexit be on pensions legislation? For the most part it would seem to be slight as most UK pensions legislation does not emanate from the EU. Areas which do include aspects of scheme funding and investment, equal treatment and employment rights on asset sales. This EU legislation is on the UK statute book and will continue to apply until the UK is empowered to and chooses to repeal it (noting that not all forms of Brexit will give free rein to the Government).
There has been some speculation that Brexit will mean that the DWP will be able to drop its plans to require pension schemes to address GMP inequalities. While it is certainly arguable that the putative legal requirement to tackle this issue derives from EU law, the idea that this issue will go away shortly is still speculative (although speculation that we encourage).
One big legal uncertainty is the “IORP” legislation. The IORP II directive (see Pensions Bulletin 2016/04) is nearing the end of the EU legislative process. If the directive were to be adopted by the EU tomorrow then the UK would still be under a treaty obligation to implement it. However, this will depend on the timing of both the Article 50 negotiations and the implementation period specified in the directive itself, so it may be that the directive never does get implemented in the UK, but this is currently unclear. It is also worth adding that, while trade and migration will likely dominate the Article 50 negotiations, UK negotiators should ensure that, whatever the nature of the UK’s future relationship with the EU, the UK must not be obliged to adopt any future attempt to impose insurance-style reserving requirements onto pension schemes in a future IORP III.
Looking further ahead, it is possible that there may be another referendum on Scottish independence. One possible future is that Scotland will be in the EU and the rest of the UK outside it. This would create cross-border issues for UK pension schemes with members on both sides of the border.
Comment
We are in a period of unprecedented uncertainty, not only in investment markets, but also in policy formation and implementation. Having said this, it would seem that for the time being, schemes and those who advise them, should operate from a starting point of “business as normal”, because to worry about everything that the referendum result is throwing up, will only lead to paralysis. Pension schemes still need to be managed, contributions need to be paid in and invested and above all else, pensions must still be paid.
NEST’s rules are updated to reflect more flexibility
The National Employment Savings Trust has now published its response to its consultation on changes to its rules to reflect new pensions flexibilities and the lifting of restrictions on contributions to and transfers to and from it from April 2017 (see Pensions Bulletin 2016/03) and has confirmed that they will go ahead more or less as proposed.
The response contains a welcome confirmation that no charge will be applied to members’ funds where they opt to take their money out of NEST via an uncrystallised funds pension lump sum (UFPLS). However, we are no nearer to knowing what it will charge for transfers in – the fear is that NEST may apply the 1.8% contribution charge.
There are also a number of concerns relating to bulk transfers which remain unresolved. Individual tax protections may unwittingly fall away on transfer in, whilst transfers out without consent would seem to need actuarial certification.
HMRC confirms delay to Finance Act 2016
The latest pension schemes newsletter from HMRC confirms delays to the Finance Bill 2016 receiving Royal Assent. In recent years, finance bills have been enacted in the July after publication, but HMRC states that it will be later this year as the Public Bill Committee consideration of the Bill is only due to conclude on 14 July. HMRC does not currently have a timetable for Royal Assent but we understand that it could be as late as mid-October.
The newsletter does however confirm that HMRC is still on target for end July to switch from the “interim (paper based) process” to the long-term online service for scheme members to register for Individual Protection 2016 (IP2016) or Fixed Protection 2016 (FP2016) to protect from the reduction to the lifetime allowance from 6 April 2016 (see Pensions Bulletin 2016/20).
The newsletter also advises that the two surveys issued via Newsletter 78 giving scheme administrators and members the opportunity to feedback views on the workings of the lifetime allowance and associated protections (see Pensions Bulletin 2016/20) are actually still open (the initial deadline was for responses by the end of May).
The rest of this newsletter is a largely a round-up of administrative issues related to pensions taxation (including some common errors in liaising with HMRC) and HMRC guidance and contact details.
Comment
The lifetime allowance reduction to £1m and associated protections are already “in law” because of a Budget Resolution made alongside the Bill’s publication (but only given permanent effect with the Bill’s Royal Assent). This is not the case for the miscellaneous other pensions tax clauses of the Bill (see Pensions Bulletin 2016/14). Trustees might want to take legal advice if processing a case that touches on relying on these ahead of Royal Assent (even if there is some comfort that Finance Bills rarely change after Committee stage and most of these provisions have been drafted to be with effect retrospective to 6 April 2016).
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
