The people of the United Kingdom face a difficult decision before the end of 2016. Should the United Kingdom remain a member of the European Union or leave the European Union? While pensions are unlikely to be a key issue in voters’ minds, the result could have ramifications beyond the dream of retiring abroad.
Before the referendum takes place, Prime Minister David Cameron is attempting to renegotiate the basis of the UK’s membership of the European Union (EU). He is seeking concessions on areas including economic governance, burden of regulation and sovereignty.
There remain political differences to resolve, particularly on immigration, but the European Council is eager to address these concerns quickly.
With the referendum seemingly a long way away, and more pressing concerns, pension scheme employers and trustees have perhaps not yet considered what a British exit – 'Brexit' – from the EU might mean for them.
Key areas of concern for pension schemes include:
The UK's competitiveness in international markets could be threatened.
Some providers could choose to move outside of the UK, or set up UK-based subsidiaries – in which case the additional costs could be passed on to schemes.
We do not expect any changes - international convergence is considered desirable by standard-setting bodies.
We think it is unlikely that the Government would repeal or relax existing regulation.
There remains a threat of additional solvency requirements being imposed by the EU in future, or a move to the “holistic balance sheet” approach – would this threat be reduced?
It is possible that schemes which are currently operating cross-border within the EU would need to identify and split out the UK portion of their liabilities.
The different sections could then be subject to different sets of regulation including on funding.
The UK would have more flexibility on VAT but HMRC are unlikely to change their stance on pension scheme costs.
If there was to be a vote to leave, this would not mean an immediate exit for the UK. The referendum vote is not binding on the government and negotiations over withdrawal could be protracted, easily stretching three to five years, or more. Much would depend on the withdrawal agreement to be negotiated, and the form of the UK’s relationship with the EU.
If a close relationship were to be desired, it is possible that UK legislation could continue to largely mirror EU developments – but with far less opportunity to influence EU regulation. For example, if the EU were to look again at imposing stringent solvency requirements on pension schemes, the UK would be unable to influence the debate. Without the UK’s opposition, which was key in prior discussions, the proposals would be more likely to pass. The UK could then be forced to adopt similar provisions if the terms of its treaty with the EU encompassed this area.
Greater than the direct impact on pension schemes could be the economic fallout. The sterling exchange rate could weaken; indeed arguably this is already happening and funding for research could be harder to come by. There is a danger that other countries could bypass the UK in favour of trading with an EU country, significantly reducing the level of investment. All of these could harm UK growth. On the other hand, an independent UK might be better placed to trade with developing economies.
"Uncertainty about the future of the UK in the European Union is a destabilizing factor"
There would also be the prospect of a further Scottish independence referendum.
The vote itself may well delay any hope of a Bank of England rate rise; it’s unlikely the bank would raise rates just in advance of a referendum.
The prospect for gilts is hugely uncertain. Overseas investors bought over £60bn of them in 2015 – would an exit vote scare them off, resulting in that ever hoped-for rise in yields? We expect not, though volatility will be a factor, given robust demand for gilts from elsewhere.
At present, the impact on markets seems muted – too many unknowns – and we suspect, like the Scottish Referendum in 2015, markets will wake up to the issue weeks before the vote if it looks close.
First and foremost, the enemy is uncertainty. A 'remain' result could knock this on the head within a year. If the UK votes 'leave', the ramifications will still be being felt a decade down the line.
Rowan Harris contributed to the writing of this blog post