Brexit will impact us in many different ways but will it have a significant impact on our pensions in retirement?
Ahead of the referendum last year, the Prime Minister suggested that Brexit could jeopardise the triple lock for state pensions. Since the referendum, modelling by Oxford University has suggested that a hard Brexit could mean retiring later.
However these (and other similar warnings) are potential indirect impacts on pensions arising from potential direct economic and other consequences of Brexit.
In this blog I’m looking at the direct impact of Brexit on entitlement to pensions under current regulations rather than trying to interpret what indirect impact any observed or anticipated economic, financial or demographic Brexit effects might have on pensions.
So, you can think that Brexit will have an economic cost (which could result in Government abandoning the “triple lock”) or you can think that Brexit will be economically beneficial (which could safeguard the “triple lock”) but both of these scenarios are outside the scope of the changes to rules that apply to pensions that are covered here.
Similarly this blog doesn’t touch on the impact of post Brexit referendum currency movements on the purchasing power of pensions in the UK or abroad.
The source materials for this blog (for anyone wanting to delve into the issues more deeply) are two detailed briefings from the consistently excellent House of Commons Library on Brexit and State Pensions and Brexit - implications for private pensions.
UK citizens who have worked (or plan to work) in the rest of the EU and EU citizens working in the UK are impacted most by the regulations that could be affected by Brexit.
(1) Brexit and State Pensions
State pensions are the responsibility of each member state in the EU. Brexit will not directly impact the design of the UK’s state pension system (as noted above – it can be argued that the economic or demographic effects of Brexit could have an impact on the perceived affordability of the state pension system but any such effects – positive or negative – are ignored here).
The UK and other EU member states (as well as other EEA member states and Switzerland) support the free movement of labour throughout the EU / EEA / Switzerland by co-ordinating state pension rules to remove disadvantages that migrants might otherwise encounter.
A major issue is whether changes resulting from Brexit will impact on people who have or who plan to work or retire elsewhere in the EU / EEA / Switzerland.
- Uprating state pensions
The UK state pension is payable to anyone eligible wherever they reside in the world but it is only increased in payment every year if the pensioner is living in the EU / EEA / Switzerland or in another country with which the UK has a reciprocal agreement covering pension increases.
Whether the state pension is increased or not makes a significant difference over time – if you retire to a country where it isn’t increased (eg Australia or Canada) you could lose tens of thousands of pounds.
In its paper on safeguarding rights published in June, the UK committed to uprating the UK state pension within the EU. This is the same position as the European Commission’s and the European Parliament’s and so there is a high degree of likelihood that the final withdrawal agreement will provide for UK state pensions to be payable and uprated throughout the EU / EEA / Switzerland (and vice versa).
Aggregation is a technical term used in this context to describe how previous periods of working in other member states are taken into account in determining eligibility for state pension.
An example might be the best way of clarifying what this means:
The minimum number of qualifying years for eligibility for the new UK state pension (for people reaching State Pension Age after April 2016) is 10. However years spent contributing to other member states’ systems will also count towards this threshold. So if you worked for 35 years in France before moving to work in the UK at age 60 and retired 5 years’ later, then the 35 years’ in France will count towards the minimum eligibility requirement and the 5 years in the UK will be recognised in this system as a result. Without this provision a person in this situation would either have to (a) contribute for 5 more years in the UK to qualify for a UK state pension or (b) receive no state pension for this period of work.
The UK’s position paper states that the UK intends to “aggregate periods of relevant insurance, work or residence within the EU made before exit [my emphasis] to help meet the entitlement conditions for UK … State Pension”.
This represents a significant potential change for people who intend to work in other states in the EU / EEA / Switzerland (or who come from these states to the UK) in the future. The UK government’s position is to honour rights built up already but to deliberately make movement of Labour between the UK and the EU / EEA / Switzerland less attractive in the future by ending aggregation.
This appears to be in conflict with the European Commission’s position because the joint technical note on EU-UK positions states that the UK “is considering its position with regard to recognising contributions made after exit.“
Clearly this is an area that has not been settled yet and could potentially impact on UK citizens who move to work in other member states in the future and vice versa.
(2) Brexit and Private Pensions
As with state pensions, private pension policy is generally the responsibility of each member state in the EU.
However there are important protections that apply to pension scheme members that originally derive from EU legislation, regulation and court rulings.
These include protection for same sex partners (see blog on a recent Supreme Court ruling) and protection of accrued rights when sponsoring employers become insolvent (see briefing note on the Pension Protection Fund).
These (and many other) protections tend to be greatly valued by scheme members and it is difficult to envisage a future UK government rowing back significantly in these areas.
One area of potential concern could be the loss of UK influence on the EU’s occupational pension regulatory regime if this regime continued to impact on the UK. This would be a particular concern in the area of occupational pensions because the UK’s occupational pension system is very different to most other member states and proposals about the funding of private sector defined benefit pension schemes could have limited impact in most member states but significant consequences for pension provision in the UK (in the extreme all private sector defined benefit pension schemes could be forced to close under certain regulatory scenarios).