BREXIT: The impact on pension schemes for employers and trustees

Out-Law Analysis | 27 Sep 2016 | 5:05 pm | 6 min. read

FOCUS: Three months after the UK's vote to leave the European Union, the effect 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 is part of Out-Law's series of news and insights from Pinsent Masons experts on the impact of the UK's EU referendum. Watch our video on the issues facing businesses, and sign up to receive our 'What next?' checklist.

There are already a number of steps that employers and trustees can take in order to best secure their position, and to ensure that they are best prepared for any future changes to the law:

  • scheme employers and trustees should consider telling members that they are monitoring the impact of Brexit on the pension scheme;
  • trustees should review their integrated risk management strategy in consultation with the employer; which may result in a revised statement of investment principles, an employer covenant review and a review of any contingent asset arrangements;
  • trustees should review defined contribution (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.

Pension scheme investments have already been affected by the Brexit vote. This impact has not necessarily been negative - for example, the fall in the value of the pound has resulted in an immediate increase in the sterling value of overseas assets.

The impact on funding levels has varied widely across defined benefit (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. Deterioration of the credit rating of a counterparty to a derivative agreement could trigger termination of that agreement. Credit downgrades could make it more difficult to post collateral and require more cash to be held, while an investment strategy may include automatic switching to gilts if investments fall below a certain level.

Trustees must monitor any such triggers that apply to their scheme and be prepared to take action – or, following due consideration, refrain from taking action that would otherwise be required - once a trigger has kicked in.

For defined benefit schemes

Trustees and employers should discuss together the potential impact of Brexit on the employer covenant, or 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.

Trustees should also 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 also 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 company's non-sterling currency. Parents may therefore be attracted to funding deficits more quickly to benefit from this, especially if combined with a benefit restructuring exercise.

Market volatility has already had an impact on the pricing of annuities, potentially making buy-outs more affordable for schemes that have hedged against volatility. Again, for foreign parent companies, the weak pound will have increased the attractiveness of a buy-out by reducing the price in terms of the parent's non-sterling currency. Further volatility in future may present opportunities for well-prepared trustees and employers.

For defined contribution schemes

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 reviewing their DC default fund strategy, and should consider writing to members to confirm that they are keeping the default fund strategy under review in light of Brexit. They may also wish to review whether their 'at retirement' offering remains appropriate.

Looking ahead

We do not yet know what form the UK's exit from the EU will take, or how much EU law the UK government will choose or be forced to retain. However, we may ultimately see changes in a number of different areas.


The UK could decide to legislate for the removal of the requirements for guaranteed minimum pension (GMP) equalisation and for gender-neutral annuities. It may also 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.

The cost of GMP equalisation has been estimated at between £13 billion and £20bn, and the UK government should be treating this as a priority regardless of the Brexit process.

Funding regime

The UK may be required to implement the new directive on the activities and supervision of institutions for occupational retirement provision (IORP II) before the two-year Brexit process is complete. This directive will not be a particularly onerous one for the UK to implement, as it deals with governance and not funding.

If the UK stays in the European Economic Area (EEA), then the risk remains that a future IORP directive could bring a stringent new solvency requirement for DB schemes.

The Pensions Regulator's integrated risk management (IRM) model was inspired by proposals by the European Insurance and Occupational Pensions Authority (EIOPA). Although this model could be dropped, some form of risk management model for schemes remains inevitable.

Business transfers

The UK government might relax the requirement for a buyer to replicate the employment terms a seller had in place before a business is sold: the Transfer of Undertakings (Protection of Employment) (TUPE) Regulations.

Currently, certain early retirement benefits provided under an occupational pension scheme transfer to the buyer's employees under TUPE. Removing these requirements could form part of a future UK government's deregulatory or 'business-friendly' agenda.

Data protection

As far as future data protection laws are concerned, much will depend on what relationship the UK retains with the EU.

Even if the UK leaves the EEA, it may still choose to implement the EU General Data Protection Regulation, which is due to come into force on 25 May 2018. 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, we expect self-investment will continue to be restricted in most cases, in order to protect scheme members and the Pension Protection Fund (PPF).

Overseas contracts and judgments

Depending on the result of the Brexit negotiations, it may become more difficult to enforce UK contracts and judgements in the EU. This could affect guarantees given by overseas parent companies, and contracts with overseas third party administrators and managers – and would also have implications for the enforceability of the Pensions Regulator's 'moral hazard' powers within the EU.


The UK Treasury may be able to write its own rules for VAT, which is an EU tax governed by EU laws. This would enable it to legislate to clarify the extent to which employers can recover VAT on pension costs - an area which is currently rife with uncertainty.

Reducing accrued rights

Reducing accrued pension rights comes with considerable legal difficulties. For example, the UK government has recently held back from reducing inflation protection in the Tata Steel pension scheme.

One of the objections sometimes raised is that such reductions would be unlawful under EU law. Brexit could mean that the UK government becomes more willing to introduce greater flexibility into the system.

The Pension Protection Fund

The PPF is partly designed to meet the government's obligations under EU law.

Although we would expect the PPF to carry on as it is, at least in the short term; Brexit would give the UK government a free hand over how the level of PPF compensation is determined and would reduce the risk of the scheme having to increase compensation levels in the future.

Carolyn Saunders is a pensions law expert at Pinsent Masons, the law firm behind