When you give people the power to choose you sometimes get an unexpected result. For the Government the decision to hold an EU referendum has produced such a result and that is for the UK to exit the European Union. The mandate they have been given is to invoke Article 50 of the Treaty of Lisbon, which is the equivalent of pressing the big red button marked ‘LEAVE’. Whilst the decision of the referendum is not binding on the Government, given the personal statements made by the Prime Minister to respect the result it is the likely next step.
The immediate effect of the result is turmoil, falling markets, a drop in the pound to levels not seen for many years, question marks over inflation and interest rates, uncertainty over political figures and indeed the Government and calls for a second Scottish Independence Referendum. All very unsettling and it will take time to stabilise as the decision is digested not just in the UK but in Europe and the rest of the World.
What can trustees and scheme sponsors take from this? Whilst the possibility of Brexit has probably been featuring on the agendas for trustee meetings in the run up to the referendum what are the topics that need to be considered now we know the result?
Trustees should be thinking about
- Discussions with your scheme sponsors over their covenant. What risk analysis are they undertaking? Set up regular meetings to assess this on an ongoing basis.
- What additional security might be required and what is available. Both in relation to employer covenant and to protect the scheme from investment volatility.
- Look at contingent asset arrangements – what circumstances could trigger funding or reporting requirements?
- If you have hedging arrangements in place what is the impact? Could assets be downgraded or creditworthiness affected?
- For Defined Contribution are the range of investments available appropriate now.
- Generally, review investment strategy to ensure it is appropriate.
What about Scheme sponsors?
- Review the impact of decisions made on the back of the Brexit vote and how they may affect the pension scheme and covenant.
- Again, work with Trustees to ensure the investment strategy is appropriate.
George Osborne mooted the possibility of an emergency budget in the event of a leave vote. Despite negative reaction to this from his own back benches and indeed the suspicion that it was a political statement designed to push voters towards remain let’s not rule this out. We know that the Chancellor had pensions tax relief in his sights but drew back from changes at the 11th hour. Could it be back in the cross-hairs?
Many aspects of pensions law have been driven by Europe, IORP for example, and there is unlikely to be any major divergence or disentangling from that. Parliament will have total control over future pensions legislation and can focus solely on UK centric issues.
Let’s not forget one thing about uncertainty. Uncertainty is fed on by scammers and I would expect to see them turning their efforts to use that uncertainty to tempt scheme members to move to “more stable” and “higher returning investments”. These will be spurious, unregulated and highly risky investments if they are indeed real. Trustees should be mindful of their duties in relation to transfers but undertake all due diligence to ensure that members are not suckered into a transaction that will prove ruinous to their hard earned savings in the longer term.
The next few days and months will see stability return as the timing, direction and management of the UK’s exit becomes clear. Let’s hope not too much damage is done in the short term.