Letter From Brussels: Brexit focus moves to pensions
As the risk of a no-deal Brexit comes into focus, attention is turning to ways to mitigate the damage across financial services, including asset management and pensions.
Tensions are mounting because of the confused state of the British government’s position. The German business daily Handelsblatt describes 2018 as the year when the battle of Britain “will hit with full fury”. A study commissioned by the London mayor, Sadiq Khan, shows dramatic numbers resulting from a worst case divorce – job losses of 482,000 and £46.8bn (€53bn) in lost investment by 2030.
The position has deteriorated fast. Last December, the photo call following the meeting between Theresa May and European Commission president Jean-Claude Junker was all smiles. But the mood soon evaporated when Michel Barnier, the EU chief negotiator, made his pronouncement that “there is no free-trade agreement between the European Union and third-country partners that would enable privileged access for financial services”.
In other words, British banks and asset managers would lose their ‘passports’ to trade across the EU. However, the reaction of TheCityUK’s CEO Miles Celic, was to ignore Barnier. He simply repeated recommendations that the EU should focus on negotiating “an ambitious, comprehensive and bespoke free trade agreement”. He may have assumed that Barnier was bluffing.
In the heart of the City itself, firms have already been planning for a worst case scenario. For instance, Colombia Threadneedle has decided to be “prudent”, according to head of institutional distribution, Dominik Kremer. The firm has assets under management totalling over €400bn, including from pension funds across the EU.
“There is no free-trade agreement between the European Union and third-country partners that would enable privileged access for financial services”
Kremer says: “We are working on the basis that when the UK leaves the EU it is likely to lose the market access rights that come with EU membership.
“With change afoot, our main priority is to ensure that clients invested in UK funds are not negatively impacted and are able to transition smoothly to equivalent European-domiciled products”. Taxation is one “matter to be addressed”, Kremer adds.
Turning to the interests of the EU’s occupational pensions funds, PensionsEurope has started work on a Brexit position paper for publication this spring, which includes a ‘to-do’ list. Jerry Moriarty, chair of the relevant working group, says matters that will have to be brought into the negotiations include fund management domiciles and arrangements for UK employees who have accumulated pension rights while working in the EU 27, and vice-versa.
Potential lost investment by 2030 resulting from a worst case Brexit, according to a Mayor of London-commissioned report
As for the UK, James Walsh, EU and international policy lead at the Pensions and Lifetime Savings Association, says risks to sponsoring employers are “the key Brexit concern” for pension schemes, yet ensuring wider economic stability is also crucial.
Walsh acknowledges that the UK is braced for competitive threats to its £8trn asset management industry. The pressure from Brussels is to tighten rules to prevent letter-box type operations from firms managed in London.
More generally, Walsh fears wider disruption and burdensome costs. He says: “Even a small increase in charges can have a significant impact on the pensions that retirees eventually receive. We’re very keen that UK pensions interests have access to the widest possible range of service providers. It is important to maintain free flows of capital.”
As they are primarily domestically focused, pension funds should, in principle, be less affected by any changes in future supranational regulatory frameworks brought about by Brexit. The fact they rest intrinsically on national social and labour law makes a good case in Brexit negotiations for the UK to retain regulatory control over its own €2.5trn pension sector.
Other points remain to be discussed. Moriarty notes that at present EU law obliges the UK government to index against inflation the state pensions of retirees resident in EU countries, including Spain and Portugal. UK retirees resident outside the EU are not so protected, and whether the UK will retain the current rules for retirees resident in the EU 27 remains to be seen.