James Walsh, Head of Membership Engagement, focuses on what we do know.
My first thought, when the editor asked me to produce 1,200 words on Brexit, was that this time I might have to resort to copying and pasting ‘I dunno’ 600 times over.
I can understand his logic: ‘There’s nothing but Brexit in the news. There must be loads you can write. You did 600 words for the November edition and it’s all ramped up even further since then, so 1,200 words this time, please. And we need it by Friday.’
If only it were all so simple. I could certainly fill a good few pages with speculation about the various political scenarios and how it might all pan out. No deal, Norway-plus, customs union, second referendum, revocation, whatever. But speculation isn’t much use to Viewpoint readers and there’s more than enough of it in the newspapers anyway. So what can I say about Brexit that might actually serve some useful purpose – and keep our word-hungry editor happy?
I reckon my best shot is to focus on what we know: what schemes are telling me about Brexit; what the regulators are doing that affects pension schemes; and what you can do to help your scheme. At least these pass the ‘know or dunno’ test. Let’s start with what schemes are telling me.
What schemes are saying
Sometimes I wish the more fevered Westminster commentators could sit in on a Brexit discussion with pension scheme managers, because it might help them to calm down a bit. Scheme managers mostly tell me that their investments are highly diversified across the globe (of course) and that any Brexit-related damage to asset prices would be unwelcome, but not a dramatic blow. Other issues in the world economy, such as the US-China trade tensions, are much more of a concern. So when it comes to the investment side of pensions, Brexit is just one of a list of issues to watch – it’s certainly not the only game in town. There is a welcome sense of keeping things in perspective.
Many managers also tell me that they have stepped up their hedging to give them more cover against unexpected swings in interest rates or inflation. So there is a sense of being prepared.
The key Brexit issue for pension schemes, of course, is potential impact on the sponsoring employer’s support for the scheme – the ‘sponsor covenant’. This is not just about DB; DC schemes also need strong employers that can put generous contributions into their workers’ pension pots. Here the responses vary tremendously, depending on the type of sponsor.
Some schemes with sponsors engaged in essentially UK-only business tell me that Brexit is, frankly, not much of an issue for them; their sponsor will be there regardless.
Other schemes that have overseas parents or just have sponsors that do significant amounts of international trade are seriously concerned about potential Brexit impacts. These could arise through weaker sales, through delays at the ports or through decisions on relocation or cutting back investment in the UK.
Even local authority pension funds, which might be thought to have a very domestic-only focus, point out that their multiplicity of employers often includes public sector agencies that distribute EU money or rely on it for their funding. In a post-Brexit world, these monies would still be distributed, but not necessarily in the same pattern; there would be winners and losers – and that will have an impact on sponsor covenant. So monitoring these employer impacts is a real issue for funds in the local government sector, too.
What the regulators are telling us
Good engagement with our members means we’re better placed when we talk to the Pensions Regulator and the Financial Conduct Authority. It’s perfectly clear to me that the regulators are doing their best to maintain continuity, to keep markets working and – ultimately – to protect people’s retirement savings through a period of potential disruption.
The FCA has been holding increasingly frequent briefings for trade associations on the state of ‘no deal’ contingency planning and I’ve been attending these alongside colleagues from the ABI, CBI, IA (Investment Association) and around 25 other financial services trade associations. I’ve never seen so many acronyms in one room!
At one of the most recent of these occasions I was able to ask Andrew Bailey, the FCA’s Chief Executive, about the future of the pension scheme exemption from central clearing of over-the-counter derivatives trades. The current legal basis for the exemption expired in August 2018 and regulators have been keeping it in place on an interim basis until the EU’s revised ‘EMIR’ regulation takes effect later this year. Many in the pensions industry have been asking whether the UK authorities would replicate the renewed exemption in the UK post-Brexit – especially if there is ‘no deal’.
Answering my question, Mr Bailey said the FCA’s guiding principle is to keep the UK’s regime as close as possible to the EU’s. The emphasis is very much on continuity. UK pension schemes will continue to be exempt from clearing during the interim period and the exemption will then continue in the UK in parallel with the renewed EMIR rules once they take effect in the EU later in the year, although exactly how that will be achieved will depend on what form Brexit takes.
The Pensions Regulator, meanwhile, is still preparing for the rather lower-profile task of updating its code of practice to take account of the revised EU Directive on workplace pensions – ‘IORP II’ – later this year. A TPR consultation is now expected in the summer, although – inevitably – all this is highly dependent on what happens with Brexit in the meantime.
What you can do
So much for the regulators, but what can trustees and scheme managers do to make sure your schemes are Brexit-ready?
The key thing is to read TPR’s recent Brexit statement. This is now the essential pensions reference on Brexit and the steps it advises apply in either a ‘deal’ or ‘no deal’ scenario. It echoes many of the points in the PLSA’s own 10-point Brexit trustee’s to do list and stresses the importance of talking to the sponsor and putting contingency plans in place – insofar as that is possible.
TPR’s statement emphasises that Brexit will not lead to any significant change in the regulatory framework for workplace pension schemes. It underlines, however, the advice previously issued by TPR and by the PLSA – that trustees should discuss with their sponsoring employers and advisers what impact Brexit (including ‘no deal’) could have on the sponsor’s support for the scheme.
Ultimately, this is what Brexit is all about for PLSA members. Understanding how workplace pension schemes might be affected has to start with understanding the sponsoring employer. Amid all the Brexit uncertainty, that is one thing we know that Viewpoint readers can definitely do.