Funding levels in defined benefit (DB) occupational pension schemes have caused immediate concern, with falling gilt yields increasing deficits significantly. Employers with open DB schemes may consider the Brexit vote the trigger to replace DB accrual with a defined contribution (DC) arrangement for the future.
Also important is the financial strength, covenant, of sponsoring employers, which should expect increased engagement with trustees keen to understand the impact of Brexit on business.
In current market conditions, many cash equivalent transfer values (CEVTs), the value of a member’s DB benefits on a transfer-out, have increased. Employers should ensure trustees manage cash flow to cope with any increased demands and to avoid forced asset sales in sub-optimal conditions. Trustees might also consider scaling back CETVs to reflect funding deficits.
Conversely, the weaker pound can benefit schemes holding overseas assets and, for non-UK employers, there may be an opportunity to reduce scheme deficits at a lower cost. For employers considering managing liabilities through bulk annuities, market volatility can create advantageous pricing; however, preparing to move quickly is key.
Investment volatility also affects DC schemes. Employers should encourage DC trustees, or their group personal pension provider, to review whether the investment options, especially the default strategy, offered to employees remain appropriate.
What of EU-derived pension requirements? Some are expected to stay in any event, including anti-discrimination provisions and data protection regulation. Depending on the UK’s future relationship with the EU, potential ‘Brexit bonuses’ include greater clarity on: reclaiming VAT on pension scheme expenses; equalising guaranteed minimum pensions between men and women; and what pension obligations pass to a new employer on a business transfer.
Attempts to subject occupational schemes to ‘Solvency II-style’ funding requirements have so far been rebuffed but may rise again, with negative consequences for sponsoring employers if the UK remains within the remit of EU law, for example, as a member of the European Economic Area.
Jill Clucas is counsel at Hogan Lovells International