Brexit and pensions: what happens next?
3 August 2016
Brexit: a legal overview Katie Banks
3 August 2016
Hogan Lovells | 3
Before After
Brexit – Immediate impact
Stephen Crabb Secretary of State for Work and
Pensions
Ros Altmann Minister of State for Pensions
Damian Green Secretary of State for Work and
Pensions
Richard Harrington Parliamentary under Secretary
of State for Pensions
Jane Ellison Secretary to the Treasury
Hogan Lovells | 4
• Referendum is advisory not binding
• Article 50
– Covers exit arrangements
– Agreement by (1) European Parliament and (2) qualified majority of EU Council (20 out of 27)
– 2 year negotiation period (Greenland in 1982 took three years)
– Triggered by clear notice by UK
– 2 year period can be extended by unanimous agreement
• No mechanism for EU to eject UK
• Does Parliament need to vote on the trigger of Article 50?
• Other challenges
• No mechanism for UK to limit application of EU law in the period prior to exit; but may choose not to comply
• European Court of Human Rights is separate
Brexit – Process
Hogan Lovells | 5
• Government needs to decide on what relationship we have with the EU in future
• David Davis – Secretary of State for Exiting the European Union
• Post exit relationship with EU to be negotiated and agreed with all member states
• EEA – Norway, Iceland, Liechtenstein
• EFTA – Switzerland
• Pre-Referendum thoughts from David Davis
– Tariff free access to the EU
– But control of borders
– If not, income from tariffs to support British industry
– Trade agreements with Hong Kong, Canada, Australia, India, Japan, UAE and Indonesia
• Civil Service needs to up skill in trade deal negotiation
Brexit – What the future might look like
Hogan Lovells | 6
Full Divorce
(no special relationship between UK and EU)
Free Trade
(wide ranging free trade deal)
Pick & Mix
(free trade deal with greater alignment in particular areas)
Associate Membership
(EEA not EU; special status with some Single Market access)
Adjusted Membership
(UK still in EU on revised terms – possibly also changes in rEU)
Influence • UK outside policy process • UK outside policy process • UK outside policy process
• Consulted as "best friend"?
• UK outside policy process
• Consulted as a "best friend"?
• UK involved in policy development
Trade
• No guarantee of access to single market
• Tariff and non-tariff barriers possible
• Commitment to no barriers in most areas
• No regulatory alignment -"passporting" not preserved
• Commitment to no barriers in most areas
• Regulatory alignment to preserve "passporting" in some areas
• Access to single market
• Regulatory alignment to preserve "passporting" in some areas
• Access to single market
• Regulatory alignment to preserve "passporting" in most areas (with some enhanced carve outs)
UK Laws • No particular alignment of UK
and EU laws • No express alignment
between UK and EU laws • Alignment of laws in specified
areas • UK follows EU laws in many
current areas • UK follows EU laws in many
current areas
People
• Qualitative controls - no favourable UK/rEU terms
• Qualitative controls possibly with favourable UK/rEU terms
• Free movement to work with some enhanced specific "brakes" or qualitative controls
• Free movement to work with some enhanced specific "brakes"
• Free movement possibly with some enhanced specific "brakes"
Financial • No UK contribution to EU
budget • No UK contribution to EU
budget • Possible reduced UK
contribution to EU budget • Significant UK contribution to
EU budget • Significant UK contribution to
EU budget
Legal
• EU law no role in UK • EU law no role in UK except areas covered by trade agreement
• EU law no role in UK • EU law applicable in UK in various sectors
• Areas of dual competency?
• EU law applicable in UK
Future EU/UK Relationship – Some Possible Models
Hogan Lovells | 7
• Directives v Regulations
• Relevant regulations
– European Market Infrastructure Regulation
– Brussels Regulation
– General Data Protection Regulation
Brexit – Immediate Legal Impact
An Aon Hewitt Webcast
Implications for investment Donald Duval 3 August 2016
9
Aon Hewitt
Proprietary & Confidential | July 2016
Agenda
1. Economic background
2. How markets reacted
3. What did this do to pension schemes
4. The future outlook
5. What should you be doing
10
Aon Hewitt
Proprietary & Confidential | July 2016
Economic background
11
Aon Hewitt
Proprietary & Confidential | July 2016
What happened to markets over June 2016
85
90
95
100
105
31/05 07/06 14/06 21/06 28/06
UK
US
EUR
JPY
-0.5
0
0.5
1
1.5
2
31/05 07/06 14/06 21/06 28/06
UK
US
GER
JPY
100
120
140
160
180
31/05 07/06 14/06 21/06 28/06
UK
US
EMU
1.15
1.2
1.25
1.3
1.35
1.4
1.45
1.5
31/05 07/06 14/06 21/06 28/06
USD / GBP
EUR / GBP
Equity markets (local currency terms) Yields on 10 year government bonds
Investment grade spreads
Exchange rates
12
Aon Hewitt
Proprietary & Confidential | July 2016
What happened to your DB fund?
-10%
-5%
0%
5%
10%
Larger schemesSmaller schemes
Source: Risk Analyzer (Aon)
Changes in funding level 23 June to 23 July 2016
13
Aon Hewitt
Proprietary & Confidential | July 2016
What happened to your DC fund?
96.0
98.0
100.0
102.0
104.0
106.0
108.0
110.0
112.0
Cu
mu
lati
ve
re
turn
re
ba
se
d t
o 1
00
Retirement Pathway 2043-45 Fund
96.0
98.0
100.0
102.0
104.0
106.0
Cu
mu
lati
ve r
etu
rn
reb
ased
to
100
Retirement Pathway to Annuity 2016-18 Fund
Brexit
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
Ret Pathway2043-45 Fund
FTSE All-ShareIndex
50% UK / 50%Overseas Blend
Returns 23 June to 1 July 2016
P R E B R E XI T P O S T B R E XI T
Level Annuity per £100,000
Male age 65
£5,088 pa
£4,902 pa
Brexit
14
Aon Hewitt
Proprietary & Confidential | July 2016
15
Aon Hewitt
Proprietary & Confidential | July 2016
UK GDP growth in 2017
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
IMF HSBC GoldmanSachs
Roubini JPMorgan
Pre referendum
Post referendum
16
Aon Hewitt
Proprietary & Confidential | July 2016
What will happen?
17
Aon Hewitt
Proprietary & Confidential | July 2016
Aon Hewitt Limited
Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority.
Registered in England & Wales No. 4396810
Registered office:
The Aon Centre | The Leadenhall Building | 122 Leadenhall Street | London | EC3V 4AN
To protect the confidential and proprietary information included in this material, it may not be disclosed or
provided to any third parties without the prior written consent of Aon Hewitt Limited.
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Copyright © 2016 Aon Hewitt Limited. All rights reserved.
Covenant – winners
and losers
Matt Harrison
3 August 2016
What Are We Covering?
19
1. Why is employer covenant important?
2. Implications of Brexit
– Macro-economic trends
– Potential winners and losers
3. TPR’s position
4. Practicalities for employers and trustees
Why is employer covenant important?
20
Confidence in covenant strength allows (all other things being equal):
– Less prudent actuarial assumptions
– More investment risk
– Credit risk to be taken for longer (e.g. longer recovery plan)
Are trustees comfortable their “underwriter” is robust post Brexit?
“The Employer Covenant … represents the extent of the Employer’s legal obligation and
financial ability to support the scheme now and in the future” TPR Code of Practice 03 –
July 2014
“Ultimately the Employer Covenant underwrites the investment risks and funding risks”
Macro-economic clarity is yet to emerge post Brexit
21
Some trends and long term expectations have started to crystallise
Picking on three key areas today:
– Foreign exchange rates
– Interest rates
– Economic confidence
How the UK Government will react to macro-economic trends?
Foreign exchange rates
22
Forward expectations for Sterling weaker since Brexit
Weaker Sterling is:
Manufacturers / Exporters
• Pharmaceuticals
• Motor vehicles
• Companies buying supplies from abroad
• UK travel companies / airlines
Good for…… Bad for……
1.1
1.2
1.3
1.4
1.5
1.6
Jan15
Mar15
May15
Jul15
Sep15
Nov15
Jan16
Mar16
May16
Jul16
Sep16
Nov16
Jan17
Mar17
May17
Jul17
GBP:USD – Post Brexit
1.1
1.2
1.3
1.4
1.5
1.6
Jan -15
Mar- 15
May- 15
Jul -15
Sep -15
Nov- 15
Jan -16
Mar- 16
May- 16
Jul -16
Sep -16
Nov- 16
Jan -17
Mar- 17
May- 17
Jul -17
GBP:USD – Pre Brexit
Interest rates
23
Lower for longer?
If money remains “cheap”……
…… it buys some time for highly leveraged
businesses……..
Continuing “march of the zombie companies”?
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
20
26
20
27
20
28
20
29
20
30
20
31
20
32
20
33
20
34
20
35
20
36
20
37
20
38
20
39
20
40
20
41
20
42
20
43
20
44
20
45
20
46
20
47
20
48
20
49
20
50
UK Spot Rates for Government Bonds Pre Brexit (22
June 2016)
Post Brexit
(27 July)
Economic confidence
24
Both consumer and business confidence has been hit
Reduced economic confidence is:
• Discounters
• UK holidays
• Big discretionary spend (cars, travel)
• “Play on GDP” businesses (banks)
• Reliant on stability / confidence (property)
Good for…… Bad for……
48
49
50
51
52
53
54
55
56
57
Jan
-15
Feb
-15
Mar
-15
Ap
r-1
5
May
-15
Jun
-15
Jul-
15
Au
g-1
5
Sep
-15
Oct
-15
No
v-1
5
De
c-1
5
Jan
-16
Feb
-16
Mar
-16
Ap
r-1
6
May
-16
Jun
-16
Jul-
16
UK Manufacturing PMI
101
101.2
101.4
101.6
101.8
102
102.2
102.4
102.6Ja
n-1
5
Feb
-15
Mar
-15
Ap
r-1
5
May
-15
Jun
-15
Jul-
15
Au
g-1
5
Sep
-15
Oct
-15
No
v-1
5
De
c-1
5
Jan
-16
Feb
-16
Mar
-16
Ap
r-1
6
May
-16
Jun
-16
UK Consumer Confidence Index
The early impact of Brexit on expectations
25
Two sectors hit particularly hard…..
€200
€210
€220
€230
€240
€250
€260
€270
€280
Jan
15
Feb
15
Mar
15
Ap
r 1
5
May
15
Jun
15
Jul 1
5
Au
g 1
5
Sep
15
Oct
15
No
v 1
5
De
c 1
5
Jan
16
Feb
16
Mar
16
Ap
r 1
6
May
16
Jun
16
Jul 1
6
Stoxx Europe 600 Travel + Leisure
Travel UK Property
£4.5
£5.0
£5.5
£6.0
£6.5
£7.0
£7.5
Jan
15
Feb
15
Mar
15
Ap
r 1
5
May
15
Jun
15
Jul 1
5
Au
g 1
5
Sep
15
Oct
15
No
v 1
5
De
c 1
5
Jan
16
Feb
16
Mar
16
Ap
r 1
6
May
16
Jun
16
Jul 1
6
iShares UK Property UCITS ETF
TPR’s view
26
Impact on sponsors can be “positive or negative”
Employer specific impact should be understood by trustees
Open and collaborative discussion with management
Understand the impact of Brexit on investment decisions and stakeholder dynamics
All in the context of the 2016 Annual Funding Statement
– Deficits are bigger…
– ….but financial strength of sponsors is also improving
– Ratio of deficit repair contributions to dividends had declined
“The pension funding dichotomy” – how will Brexit impact?
TPR issued 14 July 2016 statement on Brexit
Summary
27
There will be “Winners” and “Losers”
Work to understand the risks:
– Integrated thinking – Scheme VaR and “wrong way risk”
– Sustainable growth
Exposure to covenant risk likely to be for longer:
– Scheme cash flow dynamics
– Downside protection
Volatility and uncertainty reins
For many schemes covenant risk will increase and should be monitored
Legal implications for UK pension schemes
Duncan Buchanan 3 August 2016
A talk of two halves with a cinematic theme
What has Europe done for UK pensions?
Hogan Lovells | 30
What has Europe ever done for UK pensions?
• Equal pay and normal retirement ages – Barber 1990
• Part-time workers – Preston 2000
• Anti-discrimination laws now in Equality Act
• TUPE and the acquired rights directive – transfers of employment
• Protection of pensions on insolvency – Robins 2007
• IORP Directive 2003 – Pensions Act 2004 (Investment, funding, disclosure and Regulator)
Generally considered that these are the “Good” and unlikely that any changes will be made as a result of Brexit
Hogan Lovells | 31
• Cross Border Pension Schemes (2006)
• Pension rights on TUPE transfers Beckmann (2002)
• Life only members of occupational pension schemes (2006)
• Transfers to QROPS (2006)
• Equalising for the effects of unequal GMPs Allonby (2004)
• Unisex annuity rates? (personal pensions) – Test Achats (2011)
The “bad” (perhaps)
Hogan Lovells | 32
• IORP II (2016) – proposed solvency regime dropped at last minute
• Will it come back in the form of a holistic balance sheet?
• If it does will it impact on the UK post-Brexit?
The “ugly”
Hogan Lovells | 33
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Brexit resources
Brexit and pensions: what happens next?
3 August 2016
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