Pensions and Brexit
01 September 2019
This article was featured in the September 2019 issue of the magazine.
Henry Tapper, chief executive officer of AgeWage and director of First Actuarial, presents aspects of the effect on workplace pensions
Europe has a great deal of influence on UK pensions. The influence includes fund reporting, funding requirements, reserving against risk and even competition between service providers.
This can have very strange results. The reason that the National Employment Savings Trust (NEST) has such a complicated charging structure is because the European Commission (EC) would not allow NEST to use taxpayer money to create commercial advantage – and required NEST to levy a 1.8% charge on regular contributions. Because NEST was allowed to split the charge, others followed, including NOW: Pensions which has a £1.50 monthly charge on the investments.
The influence of Europe is felt in the money that life companies need to set aside to meet liability over-runs. The EC’s Solvency II regulations impact life companies directly but they have also had an impact on workplace master trusts that now have to set money by against their possible failure.
And it is felt by fund managers who now have to report costs against the MIFID (Markets in Financial Instruments Directive) and PRIIP (Packaged Retail & Insurance-based Investment Products) standards.
Would Britain leaving the European Union (EU) mean that we would abandon these regulations as Brussels red-tape? Most pension experts think this highly unlikely.
Many of our largest pension schemes – though locally regulated – form part of a global pension strategy and aspire to be pan-European.
It is unlikely that a firm like Unilever or Shell would argue for one level of member protection in Holland and another for the UK. You can take Britain out of Europe, but you can’t stop corporates from operating both here and there.
Then there are the pension funds – both the large portfolios that back our defined benefit schemes and the retail funds into which you and I can invest our private and workplace money. Many of these funds are set up in Dublin and Luxemburg, so they need to comply with European standards like MIFID II if they are to be used in Europe. It is highly unlikely that a UK regulator would allow lower standards to exist in the UK. Consumer organisations are already looking for areas of ‘consumer detriment’ arising from the exploitation of Brexit.
Finally, there is the very obvious but – often overlooked – fact that much as we moan about new regulations, we are very reluctant to give up legislation that works. I am not writing as a partisan remainer or leaver, but it seems patently obvious, from the lack of kickback from consumers, that the majority of EU legislation as it touches pensions is considered benign.
I attend pension conferences in Europe and there is general admiration for aspects of our pension system, especially the parts that are workplace centric. Automatic enrolment is being copied in a number of EU jurisdictions and our funded defined benefit pension system is still the envy of many countries that aspire to the level of security it provides many of us in later age. The fertilisation of ideas (such as the development of CDC – collective defined contribution scheme) is unlikely to stop even if we have a hard Brexit.
This is not to argue that Brexit has not got the potential to harm the British pension system. We are still highly dependent – for the ‘wages’ we get when we stop working – on the dividends and capital growth received from UK investments. Overseas investments are subject to currency considerations which, while they could work for good or ill of a pension fund, are likely to increase as we divorce ourselves from our largest trading agreement.
But in general, the pensions industry has shown itself, to date, relatively unconcerned about Brexit. As with the country in general, people in pensions are split between those who see Brexit as a good thing (like my partner, who is pensions director at one of our largest banks) and virulent remainers. Gina Miller, who is almost as immersed in pension fund management as she is in keeping us in Europe, is joined by other strong women, including baroness Altmann.
While it is unlike me to remain on the fence, I am genuinely undecided whether Brexit will bring pensions harm or good. One thing I am sure of, it will not change the fundamental need of people in the UK and Europe to secure for themselves financial security in later life. It remains the case – whether we are in or out of Europe – that we will still need pensions.