Why the Irish border really does matter for UK pension schemes

Much has been said about the potential consequences of Brexit on private pensions; the general consensus is that nothing will change, as most EU directives and regulation are likely to remain part of British law.

Yet, one overlooked area is cross-border schemes and, despite being small in number, their concentration in Northern Ireland (NI) and the Republic of Ireland (ROI) could cause great consternation.

Their continuing existence relies on a favourable deal on the Irish border. Although the UK and ROI have now tentatively agreed to "regulatory alignment" between NI and ROI "in the absence of agreed solutions", the shape of that depends on no deal being achieved by D-day, 29 March 2019.

At the time of publication, this deal was far from finalised, leaving potential problems for Irish and Northern Irish cross-border schemes.

Acute problem

The problem is rather niche, but as cross-border schemes go, there is a certain acuteness to the question in Ireland.

A long-standing border agreement - whereby there has been a practically invisible border since 1993 - has eased companies' ability to operate across the border, while employees can work in a country they do not live in.

For this reason, UK cross-border schemes are most prevalent in NI and ROI; there are 12 UK-registered or established schemes in the UK which accept contributions from Irish employers, split fairly evenly between defined benefit (DB) and defined contribution (DC).

Meanwhile, there are another 26 schemes established or registered in Ireland which accept contributions from British employees, again evenly split between DB and DC.

In total, these make up 81% of the 47 cross-border schemes either registered or established in Britain, or registered or established in another EU member state with UK-based employees.

And, although not all the potential issues would be unique to the region if a deal is not agreed with the EU, cross-border schemes on Ireland would be the most obviously affected. 

Burges Salmon partner Richard Pettit says NI will provide the eventual testing ground for future cross-border arrangements.

"It is a microcosm of what will happen for a lot of cross-border schemes where it is between the UK and other parts of the EU," he says. "But it is different in the sense that you've got a border and very close proximity, so you'd have people working 20 miles from each other both in the same scheme and being treated very differently post-Brexit."

Perhaps the primary issue is the impact on the companies operating on the island; it is easy to see how a company operating in both nations might see its covenant severely hit if it was unable to trade on one side of the border.

Indeed, Pettit continues: "The biggest impact wouldn't have been from a pensions perspective. It would likely have been from their employment and the security of their employment. It would probably have been an impact on the ultimate security of their benefits.

"You are looking at the impact of the covenant of the employer group. A lot of employers of members across the border would be operating across the border and would likely be hit by a hard border, because of the difficulties in moving their people around, and selling their goods and services either side of the border."

Eversheds Sutherland partner Charmian Johnson says the border would also impact investments, particularly where schemes are invested in corporate bonds.

"Any sort of restriction on trade would mean an impact on investments to pensions," she says. "It could impact the employers' standing behind the occupational schemes. It could mean employer covenant issues, and it could mean values of pensions drop in money purchase pensions."

Payments and transfers

Policies with insurers could also be impacted, due to passporting rights. Current rules allow insurers to pay out policies in countries they are not based in, but failing to reach a deal on this could stymie that ability.

Eversheds Sutherland Ireland partner Ian Devlin explains some insurers may not even be aware of this potential impact.

"There could be UK insurers who see themselves as only operating in the UK and therefore not needing to worry about Brexit or dealing with passporting rights," he states. "They might not be aware that they have members of schemes resident in the ROI and, if they ever do have to pay out, they could then have a passporting issue."

Whether these schemes would continue to be classed as cross-border after Brexit is also uncertain, as current regulations relate to schemes in EU member states.

Sackers partner Ferdinand Lovett says it all depends on the UK's status post-Brexit.

"This is all predicated on both schemes - in both the home and host country - being European Economic Area (EEA) member states, and that's what operating cross-border is," he states. "Some of this will hinge on whether we remain, if not an EEA state, something akin to it.

"That question just hasn't answered yet, because it all depends on what trade deal we're going to get."

Therefore, these schemes could be forced to wind up in some way, and employers may have to run the scheme solely from their home nation.

For this reason, Aries Insight director Ian Neale believes some savers could find themselves being transferred to an overseas scheme - which would have to be authorised by HM Revenue & Customs and then subject to a tax charge.

He says: "It becomes a lot more problematic if the ROI is treated as any other overseas country," he says. "One of the problems which would immediately emerge would concern transfers.

"If someone who was currently resident in the UK was going to be transferred to a different employer in Ireland, you would have a problem with the overseas transfers rules."

Member protections

Cross-border pension scheme members are also entitled to a number of regulatory and/or financial protections, regardless of whether their home jurisdiction differs from that of their pension scheme.

But post-Brexit, can members be sure they will still receive this support, and will there be certainty around who to go to?

Eversheds Sutherland Ireland partner Ian Devlin is not sure how this will work, stating this will be a key element of confusion for cross-border scheme members.

"If I have a complaint and my pension is now moved to another jurisdiction, who do I go to?" he says. "Irish pensioners in Ireland can take a bit of comfort from the fact that they would go at the moment to the Pensions Ombudsman of Ireland, and their complaint would be heard there, and would get a judgement and access to legal advisers there.

"However, if you transfer over to another jurisdiction then you are in an unfamiliar landscape from a regulatory point of view, and having to source legal advice in another jurisdiction is going to be a challenge.

"If someone was in a cross-border scheme and found things changing as a result of Brexit - with money being moved into another jurisdiction - then that would be a key concern for them."

For most members of pension schemes, this will not matter, but for those in these cross-border schemes, it is essential they know who to go to if they have a grievance. Will Irish members or schemes be able to seek help from The Pensions Regulator (TPR) post-Brexit, for example?

Even if this protection does continue to apply, the regulator's overseas powers may be severely weakened. The Nortel Networks case demonstrated this within the US and Canada, in that it wasn't able to apply financial support directions (FSDs) on overseas parent companies.

Say, for example, TPR needs to demand payments from an Irish employer, would this be possible?

Burges Salmon's Pettit says a hard border could worsen the regulator's overseas authority, noting it is already difficult in some EU nations.

"There are some very far-flung countries where you might think the regulator's powers would not reach - you'd think you've got very little chance of enforcing a contribution notice or an FSD in that jurisdiction - but local advice is that you'd have a pretty good chance," he says.

"But you've got countries in mainland Europe where you think it might be easier, but our local advice is you might have quite an uphill struggle to enforce what the courts in a lot of European countries would not see as a true civil debt."

He adds that it's a jurisdiction-by-jurisdiction problem, but the current relationship with Ireland currently makes this easier and a hard border could hinder TPR's abilities.

The good news

Of course, a hard border would not necessarily lead to all these outcomes; many of these questions could simply wither away, and schemes could continue operating as normal with few or no changes.

And, regardless of the outcome, there are some areas that members and schemes can take comfort from. One aspect, for example, is the protection granted by the Pension Protection Fund (PPF).

To the lifeboat fund, it does not matter where a DB scheme member is domiciled; as long as they are a member of a UK-based pension scheme, if that scheme's employer collapses, the PPF will stand behind their future benefits. This is the case for members across the world, and so would not be hit by a hard border.

It could also present opportunities for the UK to water down strict full-funding requirements faced solely by cross-border pension schemes as a result of EU legislation.

While EU regulation is brought onto the British statute book, the government could amend it to make it so UK-based cross-border schemes no longer have to meet this fully-funded requirement.

Aries Insight's Neale comments these requirements have been a significant hurdle to running cross-border schemes in the past.

"There's some uncertainty about whether the cross-border provisions will continue to operate or not, even during a transition period," he says. "But, if we assume cross-border provisions no longer apply, then UK scheme sponsors immediately have an easier situation because no longer do these notorious full-funding rules apply, which is the major barrier to operating cross-border."

Nevertheless, even without a UK move, the EU regulation with these funding requirements - the Directive on Institutions for Occupational Retirement Provision (IORP) II - will be eased from January 2019, before Brexit, to allow schemes to be underfunded with a recovery plan, subject to regulatory supervision and for a limited period of time.

The Irish border question raises a number of potential problems in the Brexit discussions, not least the security end economy of the region. Yet, cross-border pensions on the island are also at risk, the extent to which is not as yet known.

It is important for the two governments to settle a deal as soon as possible to remove the uncertainty.