Hard times? Leaving the EU and the impact on pension schemes

The implications of Brexit are likely to affect almost every facet of the wider economy. Liam Mayne, associate at Barnett Waddingham, examines the potential issues that will arise for employers in relation to defined benefit (DB) pension obligations.

The good

Brexit could see a more liberal regulatory regime for UK pension schemes. For example, changes that arise from the DB Green Paper may benefit from not having to satisfy EU constraints in the long term. Whilst much of the current regulatory framework is expected to carry over into post-Brexit, the potential for complex measures such as Guaranteed Minimum Pension (GMP) equalisation to be repealed is now more likely than before. 

Although financial markets have been volatile, the impact will vary between individual firms and some sponsors being better positioned to support their pension schemes post-Brexit if they are more competitive in UK or non-EU markets.

Allowing for exchange rate falls, firms whose earnings are predominantly overseas may find sterling pension obligations cheaper to tackle. 

The bad

Economic fundamentals are likely to be most important in determining the effect of Brexit on corporate pensions. In the short term, uncertainty has driven investors towards government bonds, which has harmed the funding position of all but the most well matched schemes; trustees will be expected to keep applying pressure to secure much needed sponsor support. 

Further bouts of quantitative easing could ensure interest rates remain lower for longer. Together with the weaker sterling, this is likely to mean some inflation at least short term.

The Brexit process is also likely to throw up a number of administrative headaches, including the arrangement of cross-border schemes. Solving such problems may not be straightforward or cheap. 

The unknown

The greatest benefits and challenges from Brexit could be those we know little about at this stage.  

Insurance buy-out market – the introduction of the ‘Solvency II’ EU insurance regulations in 2015 has meant added requirements for providers. 

Inflation measure – as the Consumer Price Index (CPI) was designed as a harmonious measure of inflation across the EU, it will be interesting to see if this maintains its prevalence. 

VAT on pension costs – employers would welcome clarity on how and when VAT on pension costs may be reclaimed. This may be more forthcoming if HMRC is not constrained by European courts.


This blog first appeared on Pensions Expert.