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Brexit: Sponsor covenant is key, say UK and European associations

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The first year of Brexit negotiations has brought some assurances for UK pension funds but there remains much still to be decided, according to the Pensions and Lifetime Savings Association (PLSA).

The trade body issued a list of concerns and requirements to government early last year in an attempt to ensure the needs of UK pension funds were heard during the negotiations with the EU.

James Walsh, the PLSA’s policy lead of engagement, the EU and regulation, indicated that some concerns had been addressed, at least in part, and recent agreements on trade and a transition period were positive for schemes and their sponsoring employers.

“Our headline concern was disruption to the economy and therefore to sponsoring employers, that [Brexit] doesn’t weaken sponsor covenant,” Walsh told IPE. “There has been some progress. We have political agreement on a transition period – it’s not guaranteed yet but it is looking like a strong possibility.”

Walsh added that there was “political will” to maintain free trade of goods between the UK and the EU, which would also be supportive for many companies and therefore pension funds.

However, he said both sides of the negotiations were running out of time to fill in the gaps in future policy.

James Walsh, policy lead for EU and regulation, PLSA

James Walsh

“Whatever sector you look at there are all sorts of regulatory questions that need to be addressed, and questions about what the system will be in the future,” he said. “These need to be addressed and we’re concerned there’s not enough time.

“These issues will all affect sponsors. We don’t attempt to get into the detail of sectors; we just point out that it’s all interwoven with pension funds. Often the assumption is that the big concern is about the impact on assets, but it’s really about sponsor covenant.”

PensionsEurope: Disruption would be ‘unavoidable’ 

Meanwhile, European trade body PensionsEurope has published a white paper calling for Brexit negotiators to pay heed to the potential impacts on pension funds and their sponsors.

Failure to reach a deal on the future relationship between the UK and EU could cost pension schemes “millions of euros” if it affected derivatives transactions, which are currently almost exclusively carried out through London, PensionsEurope warned.

In addition, the association said short-term disruption was “unavoidable” in a no-deal scenario, which would undermine sponsor covenants in many countries.

“Such disruption should be avoided and PensionsEurope stresses the need for a comprehensive and definitive agreement,” it said. “PensionsEurope also stresses that scheme employers and trustees need to work with their legal, actuarial and investment advisers to consider the risks related to Brexit.”

Jerry Moriarty

Jerry Moriarty

Jerry Moriarty, vice-chair of PensionsEurope and chair of its Brexit working group, said a “no deal” outcome would “generate uncertainty for EU citizens working in the UK regarding their own pension rights and social security rights and for UK citizens who work in other EU countries”.

Matti Leppälä, secretary general of PensionsEurope, added: “In this challenging and uncertain environment, it is of utmost importance that policymakers and supervisors do not cause any unnecessary burdens, costs or uncertainty for pension funds.

“Their consequences would be harmful also for the wider European public, as they would lead to decreasing investments by pension funds in the European real economy that creates jobs and growth. Instead, policymakers should focus on removing the barriers to cross-border investment in Europe.”

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