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BREXIT: Check whether 'leave' vote could affect employer covenant, expert warns pension trustees

Out-Law Analysis | 29 Apr 2016 | 5:28 pm | 1 min. read

FOCUS: A UK vote to leave the EU could significantly affect the financial position of particular companies - which, in turn, would impact on the ability of that company to meet its pension scheme funding obligations.

This is part of Out-Law's series of news and insights from Pinsent Masons' lawyers and other experts on the impact of the UK's EU referendum. Sign up to receive our Brexit updates by email.

In a DB scheme, it is the pension scheme that carries the risk of investment underperformance and inability to pay out guaranteed benefits to members.  Alongside ensuring the pension scheme is adequately funded, defined benefit (DB) pension scheme trustees need to ensure that the funding plan is drawn up appropriately with a close eye on the employer's ability to support the scheme. 

They should assess the so-called 'employer covenant' at least once every three years, at the same time as the scheme's regular funding valuations, and also if anything comes up that might meant that they need to take a fresh look at this – for example, a major transaction. If an employer covenant review is currently underway or about to start, or if the trustees have a decision to make that is dependent on their view of the employer covenant, the trustees should ask their covenant advisers specifically to address the potential impact of a 'Brexit' vote.

Whether they conduct the employer covenant review themselves or commission a third party to do so, trustees must make sure that all relevant matters are looked into. The review should take into account potential foreseeable economic and political changes that could affect the employer's business – of which the potential for a Brexit vote must be one of the most significant.

The strength of the employer covenant can change materially over a short period of time, depending on the business environment - meaning that ongoing monitoring may be required, in line with the Pensions Regulator's code of practice on DB scheme funding.

Trustees should consider whether the ability of the sponsoring employer to meet scheme liabilities could be weakened if the UK left the EU. Relevant questions include:

  • whether the employer relies on trade with other EU states;
  • whether that trade could be subject to tariffs or some softer form of trade barrier in the case of a Brexit vote - a particular risk for companies that trade in services;
  • whether there is a risk that the employer's parent company would wish to relocate the business outside of the UK.

These are all matters that should feed through into the employer covenant review.

Alastair Meeks is a pensions law expert at Pinsent Masons, the law firm behind Out-Law.com.