Webinar: The impact of the EU referendum on pensions

The panellists

Mark Gull, head of fixed income & portfolio management, Pension Insurance Corporation
Gull is head of fixed income and portfolio management at Pension Insurance Corporation. Prior to joining the insurer in 2007, he was a corporate bond fund manager at Aviva Investors.

Robin Ellison, independent trustee and lawyer
Ellison is a partner at Pinsent Masons as well as being an independent trustee for a number of schemes and the visiting professor in pensions law and economics at the Cass Business School.

Malcolm McLean, senior consultant, Barnett Waddingham
McLean is Barnett Waddingham's in-house pensions expert and is a regular media commentator on television, radio and in the nationational and trade press.

Tristan Walker-Buckton, actuary, Pension Insurance Corporation
Walker-Buckton is an origination actuary at PIC and has been heavily involved in a number of significant insurance deals. Prior to joining the insurer, he was a consultant at Towers Watson.

Jonathan Stapleton: What do you believe are the key implications of the referendum for UK pension schemes? Robin, can I put that one to you, please?

Robin Ellison: I don't think anything will happen if we remain, and even if we don't remain, it's going to take two or three years to disengage. So I think pension funds are running as per normal, a bit like silent-running submarines, and I don't think anybody is changing strategy or tactics on the assumption that we will remain. And I think a lot of trustees and pension fund managers are hoping, regardless of their personal views, but so far as pension schemes are concerned, that things will stay as they are, perhaps with one exception, and that is if we were to exit, the expectation, which may not be true, is that interest rates may rise within the UK. If that were to happen, then deficits would fall and that might be quite an acceptable outcome, at least for trustees.

Mark Gull: Well, I think that is broadly right. The financial markets and indeed the pension systems are working on the base case assumption that we remain in the European Union and I think that the risks are around a Brexit vote. I think should that happen, I think it is very difficult to know what may happen to financial markets because there will be conflicting pressures. I agree that the base case again for that would be that gilt yields rise. But the assumption is going to be that because overseas holders of gilts are selling, because they're a bit nervous about what's going on; we may have increased yields on gilts.

But at the same time, we'd probably have slightly weaker economic numbers coming out and in that environment generally we've seen gilt yields fall. So it's not completely clear cut. I think risk assets will suffer a little bit and we will see sterling corporate bond spreads widen to gilts. What happens to the equity market is harder to tell because lots of companies there benefit from weaker sterling. The easiest asset class to call I think is what happens to sterling, and that will be weaker.

Malcolm McLean: Yes, well, if we remain in Europe, then obviously nothing changes. Certainly not in the short term. There's continued speculation about EIOPA's plans for increased solvency requirements for occupational schemes, but they've said that they don't intend to do that at the moment, but that's something that may be on the cards for later on. So in the short term, at least, a remain vote would keep us on the straight and narrow going forward.

The immediate ramifications of a vote to leave the EU are probably going to be mainly economic and political, rather than having any major impact on pensions. But in the short term, there is likely to be quite a lot of stock market volatility, which could have a detrimental effect on pension fund deficits and may precipitate some employers actually deciding to give up the ghost in relation to their pension schemes. But that wouldn't happen overnight, it would take a longer period of time.

In terms of wider pension policy, separation from Europe would, of course, enable a United Kingdom government to actually disincorporate certain EU directives which are already in there. And that could include, for example, unisex annuity rates and things in connection with same sex couples, which Europe have issued various directives on that not everybody is happy with. So I think there could be rather more implications from a removal from Europe than remain in, but in the short term, very little is likely to happen because it will take time for us to disengage fully from Europe. In the longer term, there could be quite significant repercussions from it but we won't know exactly what form those could take.

Tristan Walker-Buckton: My main observation at the moment is activity in the pension de-risking market does seem to have been choked off in the last month or two. Aside from a handful of very brave souls who are attempting to get away de-risking transactions either before the referendum or, in some very brave cases, across the referendum and trying to work with insurers to make those happen, I think a lot of trustees and their advisers have been just looking at the uncertainty and thinking well, we'll just put a pause on any plans that we've had. They're just spending their time doing other sensible things like getting their ducks in a row on data and working out a process of work. But we certainly seem to have seen a bit less activity of people coming in expressing interest in the de-risking market.

So I think immediately, short term, after any vote, I think there will be a release of some pent-up demand there and I think we'll see certainly more expressions of interest and perhaps more transactions coming through towards the end of the year.

My guess would be that in the event of a remain vote, I think that activity will probably be a bit higher, because I think it will be back to business as usual. People just switch off the pause buttons on things they've been thinking about. Whereas, under a leave vote, maybe they'd want to wait and see how some of the macro effects pan out. But certainly I think the immediate impact of a remain vote will be to release some of the bottlenecks that we're currently seeing in the de-risking market.

Jonathan Stapleton: Robin, if I can put this one to you, even if we voted out of the EU, what's the likelihood a UK government would get rid of some of this regulation? Don't we have a history in the UK of just adding to pensions legislation? Would that be such a great thing after all?

Robin Ellison: Yes, we would get some. I agree with Malcolm that EIOPA would go away as a problem and it is an additional regulatory body which causes trouble. And some regulations would go. One of the things that would go, I think, would be some of the controls on derivatives. A lot of pension funds at the moment are avoiding derivatives, largely because of the clearing rules, which impose liabilities on trustees, which they don't want to take. So derivatives might be easier to manage. Some of the funding requirements are easier.

On the other hand, some pension schemes have got multi-national arrangements, cross-border arrangements, and it's very unlikely those will continue. At the moment, moving your pension arrangements throughout the European Union offers arbitrage advantages, particularly as the UK is now an attractive jurisdiction. And there's an opportunity for French and Italians and Dutch and Germans to put their pension schemes into the UK. That's obviously going to go away.

So it's a slightly mixed picture. We will get rid of a lot of EU investment regulation, which will be quite handy. On the other hand, we'll probably introduce it through the back door anyway.

Jonathan Stapleton: Mark, would you agree with that? Would you see there being no overall advantage on the long-term basis with regards to regulation and investment?

Mark Gull: I think sitting here as somebody who works for an insurer, obviously there would be a review of Solvency II but I think, on balance, I would agree with Robin's conclusion, that little would actually change. Potentially some more interpretations from our regulator that suit us as a market rather than trying to shoehorn everything into a single European view could be helpful as well. It's not something I would expect major changes on, though, is the key point.

Jonathan Stapleton: Is that a view you would agree with, Malcolm?

Malcolm McLean: Yes, generally speaking, I would agree with that. There are various loose ends that would have to be tied up in the event of us withdrawing from Europe. For example, if you take the state pension, it's estimated that there are around two million UK ex-pats currently in EU countries who get the benefit of annual upratings of their state pension, because there is a reciprocal agreement covering the whole of the EU. If we were to withdraw from the EU, that agreement would no longer be there and theoretically, then the EU would become a foreign country and would not be covered by reciprocal agreement and therefore the state pension would be frozen for all ex-pats.

Now I don't believe the government would allow that to happen, they would have to find a way of dealing with that by either negotiating a new agreement with the whole of the EU, with individual countries, or simply just continuing to give the annual uprating as applied to EU ex-pats. They would then run into trouble no doubt with people living in countries like Canada and Australia, where UK state pension rates are frozen, so they would have to find a way round dealing with that. But this has been an issue for a long time, the whole question of people receiving increases in the state pension whilst abroad and there is a certain inconsistency. It would just add to the problems in the event of a withdrawal from the EU and it would have to be addressed.

Robin Ellison: Could I just add to Malcolm's point in relation to state pensions, which may not be a subject of this discussion today? Which is that at the moment, under something called regulation 1408, which has been around for 40 or 50 years, if you earn state pension rights in one country but retire to another country, the country in which you retire will give you credit for those pension rights overseas. That will come to an end if Brexit happens, so people would have to start collecting little bits of pension arrangements from all sorts of countries and, because they may only have 2, 3 or 4 years with any particular country, it may not count for anything. So people who are travelling around and working in different member states of the European Union, I think, will suffer quite badly.

Malcolm McLean: It certainly complicates things, doesn't it? And it would have to be addressed. It's messy rather than perhaps a major problem but it would have to be addressed sooner rather than later in the event of withdrawal from the EU.

Jonathan Stapleton: Tristan, coming back to you, do you have any views on that?

Tristan Walker-Buckton: Well, first of all I think I agree with you, Jonathan, in terms of pensions regulation, the UK government has been quite happily building up pensions regulation and adding to it over the years, outside of influence from the European Union. And in recent weeks, it has shown it is willing to either remove that, adapt it or move the goalposts like we've seen with British Steel. So I think in terms of the changes that trustees might see, it's probably business as usual, even if we do leave.

And then, yes, on the insurance legislation, I think I would just echo what Mark said. We're not going to wake up the day after we've left, even further down the line, and tear up Solvency II. But it was quite clear as Solvency II was being developed, little features were being added which were adapted towards the requirements of certain member states and the way that they write and manage their insurance companies. So we might see some of those coming out in the interpretation.

We might hopefully see some tinkering around some of the interpretations from our own regulator which possibly could soften some of the aspects of Solvency II which currently are making insurers perhaps a bit less flexible than they might have been in the past and they might like to have been, or possibly making the insurance slightly more expensive. One might hope that longer term there'd be some adjustment in the positive direction but I do think that would be over quite a long time horizon.

Jonathan Stapleton: What should schemes be doing now?

Mark Gull: There's one thing I really think schemes can be doing. I think we've all talked about the fact that if there is a vote for Brexit there is potential for quite a lot of volatility in financial markets, particularly over a period of time as we come to understand the nature of certain relationships and certain treaties get renegotiated.

In that situation, we may see gilt yields move up and down and there may be short-term opportunities for schemes to do things and potentially de-risk. And if they're ready and they've set themselves targets or trigger levels to do that, they can move when market levels are reached. If they sit there and do nothing and wait for the market and then have a discussion, opportunities may be missed.

So I think one of the things they can do is look at the levels that they might want to do various transactions at and get those agreed first and then they can respond quicker in a volatile market.

Robin Ellison: I think massive inactivity would be a sensible thing to do. I don't play golf, but if you play golf, go and play golf. I think because the uncertainties are so uncertain, pension funds have been living with uncertainty, that's what pension funds are about. And the uncertainty is going to be shortish term.. And I think spending political capital or investment capital or whatever kind of capital you want to be involved, even time, is probably not worth it. We really don't know how it's going to pan out, nobody knows how it's going to pan out. Taking decisions now on the basis of inadequate information is a licence to lose money. So I personally would just sit tight and read a book.

Malcolm McLean: I would say keep calm and carry on, basically.

Tristan Walker-Buckton: Only that I think in practice schemes are rather locked in. Trustees don't run their schemes like investment funds, like hedge funds. They don't wake up every day, read the papers, take a view, make a decision, put that into action with that kind of speed.

So if schemes have already got in place agreed flight paths with investment managers, and so are able to automatically trade into any upswings or downswings that we might have, then great, they can probably take advantage of that. But I would say if they're not already having conversations about those flight paths, they should start going off and having those conversations with their sponsor and their managers now.

Jonathan Stapleton: Could I ask you all for your final thoughts? What are the key issues you think they should have in mind with regards to the EU referendum?

Robin Ellison: Well I think there are three or four things I would be thinking about, and again trustees have got time to think about them. Number one is it's adding to the range of uncertainties that they're already coping with like life expectancy and investment return.

Secondly, it looks like the investment opportunities may increase, whatever happens. There'll be other things to worry about, including withholding taxes in overseas investments; that's going to be an issue that may emerge.

Thirdly, the regulations framework is going to change, if there is a change in exit. But there's nothing trustees can do about it.

And finally, as mentioned, the cross-border issues for those multi-national schemes are going to pose a real problem in future, if there is an exit. I think that's probably enough for most trustees to cope with.

Tristan Walker-Buckton: I think they should just find a good seat and watch what happens, really. If we remain, it's probably back to business as usual. If we leave, lots of things will be going on, there'll be lots of things to think about. Trustees meet, what, once every three months so I think there'll be a topic for conversation for trustee meetings for the next couple of years and that's probably about how long it's going to take for some of these things, I think, to pan out.

Malcolm McLean: As I said before, I don't think there's any need to do anything drastic at the moment. There is a good deal of uncertainty. Things may happen or may not happen.

The main thing is to just hold tight, see what happens, be prepared for the possibility of a withdrawal and then decide what, if anything, you need to do at that point in time.

Mark Gull: Well I think I agree with the key conclusions that if we do vote for Brexit, there will be a huge amount of uncertainty. We won't know quite what's going to happen in markets and it will take time to know exactly how the landscape lies.

Certainly in the short term, I wouldn't recommend pension funds taking any actual action before the vote, but I do think volatility in markets will increase and volatility creates opportunity.

As much as schemes can get ready to take advantage of that opportunity, I think they should do that. Clearly if the world changes, nobody is going to make a snap decision, nor should they. But if things do move in a certain direction that would be beneficial for them, they should be ready to take advantage of that.