Brexit: Life, the universe and pensions
Christine Scott, Assistant Director, Pensions and Charities, at ICAS reflects on the impact of the Brexit vote on the UK Government’s pensions policy and on pension savers and employers.
Pension savers, employers and the wider economy
How will UK pension savers and employers be affected by Brexit? This is not a question which is immediately answerable and the answer won’t be the same for all savers and all employers.
What is not in doubt, however, is that the performance of pension savings and the ability of employers to pay for pensions is closely linked to the performance of the economy and the global economy at that.
Neither Brexit nor the impact on human behaviour of the prospect of Brexit, are the only factors which currently, and will in the future, determine the retirement incomes of those who live in the UK.
A priority for the UK Government?
There is a long history of under-saving for retirement in the UK and as private sector pension provision is expected to complete the shift from defined benefit to defined contribution arrangements in a generation, it is vitally important that the UK Government does not take its eye off the ball.
This makes the downgrading of the pensions brief by the current Government from Minister of State to Parliamentary Under-Secretary all the more concerning. There may be no change to the scope of the brief but this does suggest that Brexit may have crowded out what was a key priority in the recent past.
Monetary and fiscal policy
The Bank of England’s latest monetary stimulus aimed at supporting the UK economy through what could be a prolonged period of uncertainty following the Brexit vote will hurt savers while benefiting borrowers.
With monetary policy determined independently of Government, this leaves fiscal policy as its most significant economic lever. All eyes will be on Philip Hammond when he delivers his first Autumn Statement as Chancellor of the Exchequer later this year. From a pensions perspective, the Statement could provide an indication of where the balance of power sits with regard to pensions policy: HM Treasury or the Department of Work and Pensions. The smart money is probably with the Treasury.
The Bank of England’s monetary stimulus package
The Bank of England’s Monetary Policy Committee sets monetary policy with the aim of meeting the UK Government’s 2% target for CPI (Consumer Prices Index) inflation, in a way that helps to sustain economic growth and employment.
The Bank of England recently announced a further stimulus package. This package consists of:
- A 25 basis point cut in the Bank Rate from 0.5% to 0.25%.
- A new Term Funding Scheme to reinforce the pass-through of the cut to banks and building. societies and from them to households and businesses.
- The purchase of up to £10 billion of UK corporate bonds.
- An expansion of the asset purchase scheme for UK government bonds of £60 billion.
This takes the total stock of asset purchases (i.e. quantitative easing) by the Bank of England to £435 billion.
Pensions law and the EU
Turning to the topic of pensions law and regulation, there remains a question over whether the UK will adopt the second EU Pensions Directive (IORP II) which seeks to strengthen pension scheme governance and communications with members. This could depend on timing, as the UK could still be a member of the EU when IORP II is due to be implemented towards the end of 2018. However, implementation could also depend on the UK’s future relationship with the EU and adoption may be viewed as advantageous (and politic) in any event.
Plans to introduce insurance industry-style prudential solvency requirements for defined benefit schemes, through IORP II, were ditched due, in no small part, to the lobbying efforts of the UK pensions industry and the UK Government. This unpopular proposal could have made defined benefit schemes in the UK, and also in Ireland, entirely unsustainable.
Looking ahead to any potential IORP III, the UK Government should take care to ensure that any commitment it makes to adopting EU Pensions Directives should exclude any requirement for UK defined benefit schemes to adopt more onerous solvency requirements.
Pensions law and regulation in the UK: a brief history
The EU’s impact on pensions is largely on private pensions rather than on State or public service pensions. Private pensions fall into two categories: contract-based and trust-based, and the impact of the EU is reflected as follows:
Contract-based arrangements are regulated by the UK Financial Conduct Authority. The history of modern financial services regulation is UK rather than EU in origin. However, since 2000, the legislative balance of power has shifted to the EU but supervision remains at UK level.
Private sector trust-based arrangements are founded on the law of trusts and the modern UK pensions system was initially shaped by the Maxwell scandal of the early 1990s. However, the EU’s Pensions Directive 2003 (IORP I), which resulted in the Pensions Act 2004, shifted power towards the EU.
In summary, there is little in life which does not have a bearing on the adequacy of pension saving and retirement incomes. This makes an examination of the impact of Brexit on pensions very difficult to unravel from the impact of everything else on pensions.
While we know from Douglas Adam’s The Hitchhiker’s Guide to the Galaxy that the answer to life, the universe and everything is 42, we have yet to find the equivalent answer for pensions.