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The risk of a "No Deal" Brexit gives rise to a number of risks for UK pension scheme trustees. Trustees are legally required to maintain internal controls over risks and each scheme needs to have a risk register and update it from time to time. Our advice is that a "No Deal" Brexit creates a number of known risks which trustees need to recognise and manage in the six months left until Brexit.
The European Union (Withdrawal) Act 2018 provides that the UK leaves the European Union on 'Exit Day', which is defined as 11pm on 29 March 2019. While the Government is attempting to reach a settlement agreement with the European Union for detailed agreement on an orderly Brexit, the Act will currently take effect on Exit Day even if no deal is reached.
It is possible that developments in relation to Brexit will affect a scheme's employer covenant. For some employers (such as pharmaceuticals, freight transport, fresh produce retailers, industries with tightly managed international supply chains) the impacts could be significant and rapid. For others the impact may relate more to Britain's general economic performance. The trustees should monitor employer covenant regularly and any impact may be noted in the covenant monitoring which already occurs. But trustees should analyse whether a specific review is necessary for the risks created by Brexit.
For schemes that contract with UK investment managers there is unlikely to be any action to take because the managers have UK regulator authorisation and that will continue. Where trustees have contracted with investment managers using cross border authorisation, the position needs to be reviewed. A significant amount of financial services legislation and the practice of financial services companies use EU-wide legislation and passporting regimes. Even with a 'No Deal" Brexit, there is unlikely to be any significant impact on the legal arrangements which trustees already have with investment managers which use passports but trustees should at least have a clear record of what arrangements they have.
The financial services passporting provisions will have applied at the point at which the trustees entered into the relevant agreements, and the UK Government has announced plans for a temporary permissions regime even in the event of a no deal Brexit. This provides for investment managers based in the EU27 to transition to UK authorisation and for European funds to transition to UK recognition so there should be no cliff edge moment on 29 March 2019.
We understand that financial services providers, in particular banks and insurers, have contingency plans to restructure their arrangements for carrying on business and in particular how investment management and fund arrangements based in the EU can continue to be promoted and provided to a British business. This may have an impact on the arrangements which trustees have. Trustees and their advisers need to review carefully any communications they receive from financial services providers as they develop their Brexit plans and notify clients of them. It may become necessary to chase proactively in some cases.
There is a risk of an impact on markets affecting the values of investments which could be triggered by a no deal Brexit or, for that matter, a Brexit which does have a deal behind it. We recommend that the trustees seek investment advice as to the market risks and management of them to be considered in autumn 2018 and then for that advice to be updated in early 2019 as and when appropriate. For instance, we have already seen impacts resulting from exchange rate movements, and currency hedging may become more desirable.
Where a scheme benefits from a parent company guarantee given by a EU-based company that guarantee may need reviewing. There is nothing on the face of a PPF standard guarantee that would cause it to terminate simply because of Brexit with or without a deal and the British government has indicated that it will adhere to the Hague Convention on recognising jurisdiction clauses in contracts, which it can do unilaterally. However, not all guarantees have exclusive jurisdiction clauses and a "No Deal" Brexit may increase the work that may be required if the guarantee ever needed to be enforced. We recommend that if a "No Deal" Brexit still appears a likely scenario early in 2019 then legal advice is sought on how to enforce the guarantee in the guarantor's home country.
Under the General Data Protection Regulation ("GDPR") data can only be transferred abroad to territories which have adequate protection for data security. Although GDPR is an EU law it has been adopted into UK law and will continue to apply after Brexit. It is expected that Britain will allow transfers of data to the EU even in the event of a no-deal Brexit and even if the EU does not automatically treat Britain as meeting the same adequacy tests. Nevertheless it is best practice for trustees to ask their administrators to confirm which territories they do transfer data to so that any risk in this area can be monitored.
Finally, it may be sensible to book placeholder appointments for conference call trustee meetings for the period running up to Exit Day in case urgent decisions are required from the trustee board. The position should be clearer by then and the trustees can consider the updated position particularly in relation to investment arrangements.
Please note this article first appeared in Pensions Age.