Big Question: What impact would a Brexit vote have on pensions?

Q. What impact would a vote to leave the EU have on pensions?

Hogan Lovells partner Duncan Buchanan Society of Pensions Professionals president Duncan Buchanan

Pros include freedom from future EU pension regulations such as the IORP directive, thereby giving the UK complete control over the design and regulation of its pension regime. Wide-ranging EU directives in the fields of financial crime, financial services, solvency and data protection may no longer apply.

The potential to repeal existing EU laws, and not implement new ones, may remove significant financial liabilities such as the £10bn cost of GMP equalisation.

Meanwhile, an ‘In’ vote may weaken theUK’s ability to opt out of the EU drive towards closer harmonisation of financial, regulatory and legal regimes.

The possible cons are heavily dependent on the nature of Brexit. If it were based on Nor­wegian or Swiss models, the UK would lose influence on policy while still being subject to it.
The short-term effect on financial markets of an ‘Out’ vote, and uncertainty over the model to be adopted, could seriously affect gilt yields.

Not leaving the EU, and being seen as an enthusiastic participant, may increase UK influence over future EU policy on pensions as well as other areas. Further, opponents of Brexit may point out that Cameron’s draft deal with the EU contains the necessary safeguards to act as an emergency brake on excessive regulation.

Olivier Lebleu, OMAMOld Mutual Asset Management head of international business Olivier Lebleu

Institutional investors and pension funds ought to be aware that, were a small number of large companies to redomicile as a result of an EUexit, either for trade purposes or to be nearer the markets from which they derive their revenues, portfolios and risk exposures would have the potential to change significantly.

Several of the largest companies whose EU or ‘rest of world’ earnings far outweigh their UK revenues are major components of UK equity funds, index trackers and income funds, and are, in some cases, significant contributors to those funds’ performance.

In the shorter term, asset owners shouldfully understand their exposure to those sectors whose earnings would be most exposed in the event of a Brexit. Pension funds that are heavily exposed – directly or via UK, European and global funds – to sectors such as telecoms,information technology and consumer dis­cretionary, which are the most exposed to the EU, should assess whether the potential volatility in those firms’ future revenues after an ‘Out’vote would significantly alter the risk profile of their overall portfolio.

Georgina Beechinor, SackersSackers senior associate Georgina Beechinor

The extent to which UK legislation would continue in its current form in the event of an ‘Out’ vote would depend on both the form of therelationship agreed between Britain and the EU and the political appetite in the UK to dispense with or amend existing legislation. While some areas could be targeted at an early stage, including GMP equalisation and survivor benefits, most changes would take longer to filter through.

At the moment, the state pension and healthcare rights of around two million UK expatriates living in EU countries are protected. Should Britain leave the EU, those benefits could be frozen, as is currently the case for British pensioners living in countries outside the EU where there is no reciprocal social security agreement under which state pensions are uprated.

With markets inevitably jittery in the run-up to the referendum, trustees and employers should ensure their ongoing integrated risk management processes are up to date. It is important that
trustees monitor their scheme’s funding assumptions and investment strategy, check contingent asset reporting requirements and funding triggers, and keep an eye on the employer covenant.

Trustees should also review their scheme’s hedging strategy, including counterparty credit ratings and the scheme’s ongoing exposure of derivative and swap contracts against the coll­ateralised liabilities.