Key points to help prepare your pension scheme for the end of the transition period

At 11pm on 31 January 2020, the UK ceased to be a member of the European Union (EU). A legal and regulatory 'cliff edge' was avoided at this point because the UK entered into a transition period. During the transition period the UK was, for most purposes, treated as though it were still a member of the EU. The transition period will come to an end at 11pm on 31 December 2020.

With the end of the transition period rapidly approaching, trustees of defined benefit (DB) and defined contribution (DC) pension schemes must get ready to deal with the consequences of the change in the UK's relationship with the EU. However there is still a great deal of uncertainty as to what that relationship will be. It is unlikely that a deal between the UK and the EU will be agreed until the last minute. It is also possible that no deal will be reached.

Therefore, trustees need to be ready to identify what, if any, steps they need to take in advance of 1 January 2021 and be ready to prioritise. To do this, there are some steps that trustees can focus on now.

How is the sponsoring employer's covenant affected?

The impact of Brexit on a scheme's sponsoring employer will vary according to a range of factors. These include:

  • the sector they operate in;
  • how exposed their particular business is in respect of the UK's decision to leave the EU (e.g. is the employer dependent on supply chains based in EU member states? Is the employer vulnerable to delays on imports and exports at ports? Does the EU represent a material customer base for the employer?); and
  • the nature of the UK's future relationship with the EU and other countries (e.g. will the employer be adversely impacted if the UK does not agree market access in a particular sector such as financial services?).

With many businesses being adversely impacted by COVID-19, trustees of DB schemes have had to focus on the strength of the employer covenant. The impact of Brexit on scheme sponsors should also be considered by trustees. Trustees should maintain dialogue with sponsoring employers and request information on how the sponsor is preparing for Brexit.

If applicable, trustees should speak with their covenant adviser, especially if they have concerns about the impact of the UK leaving the EU on their scheme's sponsoring employer(s).

What is the impact on the sponsoring employer?

As part of the covenant assessment, trustees should be having open and collaborative discussions with a scheme's sponsoring employer. As with COVID-19, there may be requests about deficit repair contributions (DRCs). If the employer proposes to reduce DRCs, trustees will be expected to test whether this is the right thing to do. Trustees should take appropriate advice (including the impact of the Corporate Insolvency and Governance Act 2020 and the latest guidance issued by The Pensions Regulator on sponsoring employers in distress.

If the scheme's sponsoring employer is based outside of the UK in a country that is a member state of the European Economic Area (EEA) trustees should also consider the possible implications of this both on the sponsoring employer's business activity and on the strength of the trustee's legal covenant with the sponsoring employer.

What is the impact on any contingent funding arrangements?

If trustees currently benefit from a guarantee from a company based in a country that is a member state of the EEA, the enforceability provisions of this may be affected by Brexit. Guarantees may need to be reviewed and trustees should consider if risks can be mitigated or whether alternative contingent funding arrangements should be sought.

What do trustees need to do in relation to investments?

Trustees should already be reviewing their scheme's position and scenario planning as part of their ongoing integrated risk management. Market volatility may affect a DB scheme's funding position. Trustees should ask their investment adviser to explain any such changes in the context of the schemes' overall investment strategy. Trustees need to understand the potential risks to the scheme investments from Brexit and whether specific actions or mitigations are appropriate.

If, as part of the scheme's investment portfolio, the trustees are counterparties to ISDA derivative contracts they will need to understand the final position of the clearing of these transactions in the EU. It is unclear at this stage whether the existing exemption which applies to pension schemes will continue going forwards. Trustees should ask their investment advisers to keep them up to date on developments in this area.

Trustees of DC schemes should continue to review the longer-term performance of individual funds on a regular basis and consider if the default fund remains appropriate.

Will Brexit stop pensions being paid to members residing in the EEA?

As is always the case, a key priority for trustees is making sure members' benefits are paid on time. Some UK banks are closing the UK-based bank accounts of UK citizens who live in one of the member states of the EEA. As a result, it could be that members suddenly stop receiving their pension and/or request payment to a bank account of a bank based in a member state of the EEA.

Trustees should ensure that the scheme's administrator is aware of this issue and is ready to deal with the additional work which this may create. Administrators should also be particularly alert to scam requests for changes to pension payment details during this period. Also it should not be assumed that scheme rules permit payments to all overseas bank accounts so the scheme rules should be checked.

Some pension scheme choose to secure pensions with an annuity for the member. In the past it was possible to purchase annuities for members residing the EU. However, there is still uncertainty as to whether the existing arrangements which permit this will continue. This will need to be kept under review.

Finally on member payments, because of uncertainty over the UK's status as a third country under the General Data Protection Regulation (GDPR) it may be more difficult for trustees to obtain information about the health or death of a scheme's members and beneficiaries who reside in a member state of the EEA. Once again this will come down to the negotiations on the future relationship between the UK and the EU and how this interacts with the GDPR's provisions on transfers of data from EEA member states to non-EEA member states.

What is the impact on transferring scheme data?

On and from 11pm on 31 December 2020, the UK will be classed as a third country for the purposes of the GDPR without the benefit of the transition period keeping the UK within the GDPR's regime. As a result, there could be issues with the transfer of personal data from member states of the EEA to the UK. Trustees will be safe transferring data to the EEA but there is still no clarity as to whether the UK's agreement with the EU will cover data protection and/or whether the UK will classed by the European Commission as having 'adequate' laws in place relating to the privacy of data.

Given the importance of personal data and sensitive personal data in running their schemes, it should be a key priority for trustees to review whether any of their systems and procedures (or the systems and procedures of their third party service providers) require the transfer of personal data from an EEA member state to the UK. Trustees should keep watch for the final position on data once there is more certainty and, if necessary, take appropriate advice.

What happens if members get in touch?

Members may contact trustees or the administrator for further information on the impact of Brexit on the pension scheme. You should check that your administrator is prepared to answer queries.

Trustees should be prepared to explain clearly to the members the work they have done to understand how Brexit may impact the pension scheme and the steps which the trustees have taken to address the issues.

The Pensions Regulator says trustees should encourage members to contact Pension Wise (if they're over 50) or The Pensions Advisory Service for free and impartial guidance.

Do you understand the impact of Brexit on the key services to your scheme?

The Pensions Regulator has encouraged trustees to read the Department for Work and Pensions' guidance on pensions and benefits for EEA and Swiss citizens in the UK and UK nationals in the EEA or Switzerland.

Trustees should understand the impact of the UK leaving the EU on any key services to their scheme that are provided from the EU or by firms that are themselves exposed to the EU, e.g. asset management.

Next steps and actions

In the run up to 31 December 2020, there are some practical steps with trustees can take now. However, it will only be very late in the day that we will understand what Brexit is likely to mean for pension schemes in practice and depending on the form of any deal it may be that the obligation to comply with EU law which impacts pensions will continue. Trustees should continue to watch out for future developments and prepare to take action as and when necessary.