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Letter from Brussels: Who cares about our €3.5trn?

PensionsEurope, the body representing Europe’s occupational pensions associations, is concerned about a Brexit ‘no deal’, and is calling for negotiators to pay heed to the €3.54trn sector’s interests. Much is at stake, as outlined in a recent PensionsEurope position paper on Brexit. 

Pension rights for EU citizens in the UK are one of many challenges requiring urgent attention as time runs out. Another anxiety is a potential rise in the costs associated with derivative usage. Here, doubts concern the legal status of related contracts after the UK’s withdrawal under article 50 of the Lisbon Treaty. 

The overall assessment is that a ‘no deal’ Brexit – its term for a cliff-edge scenario – could cost pension funds millions of euros.

The paper is designed to focus minds. Indeed, attention has not been paid to financial services issues hitherto, let alone pensions, as political discussions have been centred elsewhere, for instance on membership of the Single Market and Customs Union. Key Brexit negotiation items are proving difficult – “extremely” so, according to sources such as Luxembourg finance minister, Pierre Gramegna.

As another Brussels commentator, Joost Mulder, director of public affairs for BetterEurope, puts it: “Even with the best intentions on both sides, the time line is very tight, and a minor bump in the road could ruin the withdrawal agreement.” The next major hurdle, the October summit – supposedly the final deadline – is approaching. 

Philip Hammond, the UK’s chancellor of the exchequer, reportedly said in April that any discussions on financial services were at the preliminary stage. The UK’s Department for Exiting the European Union dodged questions from IPE on the status of negotiations in relation to pension issues.   

Pekka Eskola, economic adviser at PensionsEurope, who wrote the paper says: “In the past, the UK has been able to significantly influence the development of the EU, including financial markets and IORPs. Post Brexit, member states will need to adapt and build new coalitions. In the light of lack of progress of negotiations, the conclusion has to be that certain targets essential for the smooth running of EU’s IORPs schemes could fall by the wayside.” 

Aware of timing, PensionsEurope emphasises that pension schemes will have to start preparing for the IORP II Directive ahead of the implementation date – probably as soon as mid-June. 

As the PensionsEurope paper points out, the UK, and London in particular, is the European base for a number of investment managers providing services to international pension funds.

€3.54trn

value of assets within Europe’s occupational pension sector

The impact of Brexit on asset management is unclear, but the UK’s market share is undoubtedly sizeable. Bernard Delbecque, senior director for economic affairs and research at the European Fund Asset Management Association (EFAMA), points out that total European AUM was €21.6trn at the end of 2015, of which €7.8trn was managed in the UK, giving it a market share 36.3%.

The UK also manages 50% of total EU assets in discretionary mandates, according to Delbecque. This totalled €10.3trn in 2015 compared with €11.1trn in investment funds. The UK is also the third-largest domicile for UCITS assets, with a 12.6% market share as at the end of 2017. Luxembourg led with 35.9%, followed by Ireland with 18.8%.

In the EU’s €3.54trn occupational pensions sector, the UK’s assets were €1.61trn in 2016, according to last year’s EIOPA Market Development Report. Without the UK, the Netherlands, with €1.29trn, would be the largest EU pension asset domicile. 

The word “disruption” appears 25 times in PensionsEurope’s six-page paper. The institution warns that any overnight imposition of World Trade Organization tariffs on UK-EU trade in goods would cause short-term disruption. In the case of companies with complex, cross-border supply chains, it forecasts that Brexit could undermine “the ability of employers to continue to sponsor and support pension arrangements”.

On passporting, PensionsEurope offer a glimmer of optimism, noting that special arrangements are already in place for Switzerland and Gibraltar. A failure to allow UK-based firms to continue with such rights “would cause significant disruption and cost with contracts having to be rewritten”.

If the worst does occur, the paper predicts a “negative impact on [overall] economic outlook”, which will then “impact on investment markets and put the funding of [pension] schemes under pressure”. The paper continues: “It would also provide uncertainty for EU citizens working in the UK regarding their own pension rights and social security rights and UK citizens who work in other EU countries.”

The UK’s Office for National Statistics stated a year ago that the population of British citizens resident in Spain was 296,600 in 2016, of which 121,000 (40%) were aged 65 and over in 2016 – a figure that has doubled since 2006.

With the insurance sector in mind, Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (EIOPA) said late last year: “It is essential that… undertakings consider all eventualities, including the possibility of no political agreement at the date of withdrawal.” 

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