What does Brexit mean for UK pensions?

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A vote to leave the EU, a new Prime Minister and a new direction of travel for the country – Brexit has profound implications for us all.

In the pensions world, the apparent demotion of the pensions minister role to undersecretary of state has caused some concern that pensions is no longer a key priority for the government. So what does Brexit mean for UK pensions?

In one sense, Brexit has not changed the country’s immediate pension priorities – of which there are (seemingly always) plenty.

Ros Altmann summarised her priorities in her resignation letter to Theresa May:

Widely recognised as a pension policy success, it is hard to argue against anything but seeing this through with as little fuss as possible. 
A more controversial one and whilst George Osborne definitely had radical reform in his sights, less is known about Philip Hammond’s views. The Autumn Statement should provide an insight but I think the Chancellor will find it hard to resist some change if public finances are under strain.
There is no doubt that the publicity surrounding BHS and British Steel has brought this old chestnut back into the public spotlight – and our report on the DB pension obligation of FTSE350 companies highlighted the £1.4 trillion of pension payments they are due to make over the next 60 years.

Should The Pensions Regulator be more pro-active and given more powers to protect DB schemes from failing employers, or should new legislation be brought in to ease the burden on employers? A difficult balancing act – but at least there is now no chance of the dreaded ‘Solvency II for pensions’ provisions being brought in by the EU.
A difficult challenge and if there may be a case for some flexibility here.

Short-term impact

So if our priorities have not really changed, then what has?

In the short term pension funds are mainly dealing with the fallout in the investment markets. Whilst mostly a gloomy picture, the ICI Fund did provide a glimmer of sunshine by completing a £750M buy-in with L&G, which was ostensibly slightly cheaper as a result of Brexit though well within the realms of typical market movements. But most pension schemes will not have had any good news.

"A new pensions directive is due to take effect in 2018 but with the UK likely to be out of the EU by the beginning of 2019, it is likely to have no real impact here."

Long-term interest rates are down by about 0.5% and this will have increased pension deficits. Those schemes still not hedging their bets on interest rates will have felt the pain particularly acutely. Companies with year-end reporting at 30 June 2016 (Diageo, BNP Billiton, First Group to name a few) will perhaps feel particularly unfortunate given the stress that’s likely to show on their balance sheet this year.

But the depreciation of sterling is good news for overseas parents reporting their DB liabilities in a foreign currency. Perhaps this will encourage foreign parents to put their hand in their pockets and plug some of the deficit at a time when it is cheap for them to pay back sterling denominated debt.

Long-term impact

In the longer term, much is unknown. It does seem clear that the EU will have far less influence on the regulatory regime going forward. A new pensions directive is due to take effect in 2018 but with the UK likely to be out of the EU by the beginning of 2019, it is likely to have no real impact here. The dream of a well-functioning market of cross-border pension schemes also seems dead in the water.

But one of the larger worries about Brexit is the impact it has on Scotland. In 2014, many pension schemes worried about the implications of an independent Scotland and the carving up of, or creation of cross-border, pension schemes that would result. This is now a risk to start taking seriously (again).

We will be keeping a close eye on developments over the coming months – watch this space!

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