Brexit And Pensions - A Recipe For Uncertainty

Expat Briefing Editorial Team, 07 June, 2016

For those still considering the merits of the United Kingdom's membership of the European Union, it is becoming increasingly difficult to penetrate the hyperbole and apocalyptical forecasts layered up by both camps and reach the facts. While we at Expat Briefing don't intend to attempt to sway your opinion one way or another, in this feature, we will try to examine, with as level a head as possible, the legal consequences of a Brexit for the army of Brits who have retired to the EU's sunnier climes and their pensions.

A Two-Way Street

Since the EU now exists to facilitate the free movement of people and capital around Europe, millions of people have moved around the continent in recent years in search of a better life. And, at the risk of also sounding hyperbolic, it is no understatement to say that a British withdrawal from the EU could have a huge impact on the lives of millions of people.

All told, about 11m citizens of the EU now live in a different member state to the one of their birth. It is said that about 2.7m of these now reside in the UK. However, this has by no means been a one-way street of migration into the UK. Although the figure is often disputed, it is safe to say the hundreds of thousands of Brits have taken advantage of the freedom of movement principle to live and work in other parts of the EU. According to Migration Watch UK, there are currently about 1.3m British citizens who live elsewhere in the EU. The greatest concentrations of these British expats are to be found in Spain, France, Ireland, Germany and Italy, a large percentage of which are retired. In the following sections we look at the legal implications of a Brexit on their pensions.

State Pensions

Under existing rules, an expat reaching retirement will make a claim for a state pension in the country where he or she is living.  There is no transfer of pension rights as such: rather, each member state where the expat has worked or lived up to that point provides a pro-rata contribution based on agree formulae. However, EU withdrawal would see the end of long-standing provisions in EU law (also applying to the wider European Economic Area and Switzerland) to "coordinate" social security schemes. Without alternative arrangements in place, there is a great deal of uncertainty over pension rights for UK nationals who had spent periods living and working abroad.

In the event of its withdrawal from the EU, the UK could instead seek to negotiate bilateral reciprocal social security agreements with individual member states; indeed, the UK already has a number of such agreements with non-EEA states, and agreements with certain EEA states which pre-date the UK's entry into the then European Community. These might cover matters such as reciprocal recognition of periods of insurance and residence for benefits purposes, exportability of benefits, continued annual uprating of benefits for people living abroad, and aggregation/apportionment for contributory benefits and retirement pensions. The worry is, however, that these bilateral arrangements could be more limited in scope than the EU coordination rules, as they tend to be with non-EEA countries.

A 2013 report by the UK Parliament's Commons Library (which, reassuringly, didn't predict plagues of locusts or World War Three in the event of a Brexit) observed that: "The likelihood of the UK securing a bilateral agreement, and the precise terms, could vary from country to country depending on the relationship between that country and the UK. The UK might not be able to extract terms favorable to UK nationals, or might not be able to reach agreement at all, if there is an imbalance between the number of UK nationals living in that country and that country's nationals living in the UK, or if the country perceives the UK's immigration/benefit rules as impacting disproportionately on its own nationals."

As an alternative to seeking individual bilateral social security agreements, the UK could seek to negotiate a single agreement with the EU/EEA as a whole. This, the report notes, would simplify matters for people who had worked and been insured in more than two Member states. Such an agreement might end up closely resembling the existing EU/EEA social security co-ordination rules.

"For individuals who work in more than one member state during their working life, the advantage of EU membership is that the UK is part of a system for cross-border coordination of state pension entitlements," it notes, adding that these arrangements enable the individual to make an application to the relevant agency in the country of residence (in the UK, the International Pension Centre), which then arranges for each member state where a person was insured for at least a year to pay a pension. There is no transfer of pension rights to the pension system of another member state.

In addition, UK state pensioners resident in EEA countries receive annual increases to their UK State Pension. Outside the EEA, the state pension is only uprated if the UK has a social security agreement with that country requiring this. If the UK were outside the EU therefore, the UK Government would have to seek to negotiate such agreements with EU/EEA Member states.

Since there is no precedent for a member state withdrawing from the EU, the impact on state pension rights for UK expats in the EU in the event of a Brexit is very much up in the air. However, given the complex economic and legal relationships between a major member states like the UK and the EU, it is probably in nobody's interests to begin tearing these arrangements up as soon as a vote for Brexit is called. But it's probably safe to say that it will be some months, or even years, before it is all sorted out.

Occupational Pensions

For the millions of people who have worked in another member state, EU legislation also attempts to protect pension entitlements and enable pension funds to benefit from the Internal Market principles of free movement of capital and freedom to provide services.

"Occupational pension schemes vary considerably across member states," the Commons report observes. "This has implications for people who have worked in, or for companies based in, another member state."

The legislation in question, known as the IORP Directive, allows pension funds to manage occupational pension schemes for companies that are established in another Member State and allows European-wide companies to have only one pension fund for all subsidiaries in Europe (schemes with fewer than 100 members are exempt from the requirements of the directive). This legislation also establishes prudential standards to ensure that members and beneficiaries are properly protected, as well as requirements concerning the disclosure of information.

While the legislation is far from perfect, it is obviously a major concern to UK nationals working in another member state whether they will be able to join their company's scheme, and if so how portable this will be.

In 2012 there were 84 EU cross-border schemes, and under the IORP Directive, such schemes are subject to more stringent funding requirements. Being outside the EU would therefore have implications for UK citizens who were members of pension schemes that operate on a cross-border basis.

"It is probably in the interests of the UK that, where its citizens are receiving a pension from another State, that State's scheme is fully funded," the Commons Library report says. "Outside the EU, there would be no mechanism in place to ensure this, so it would have to be done through negotiation."

"The UK Government might also want to find channels to negotiate improvements in the environment for the operation of cross-border schemes," the report adds.

There would be other implications flowing from a UK withdrawal in terms of legal protections for those paying into an occupational scheme. The EU Insolvency Directiveprovides for the protection of employees' rights in the event of the insolvency of their employer, including requiring member states to adopt measures to protect the interests of pension scheme members. As things stand, there is no obligation on member states to provide a full guarantee, and they have considerable latitude as regards the level of protection provided.

The report concludes that if the requirements of the Insolvency Directive no longer applied, "the UK Government would probably have greater latitude to decide what levels of protection were appropriate."

On the other hand, the UK Pension Protection Fund (PPF), set up under the Pensions Act 2004to provide compensation to members of schemes that started to wind up underfunded from April 6, 2005, is now well established. The PPF protects hundreds of thousands of people who might have otherwise lost their pensions, and had a surplus of GBP3.6bn at March 31, 2015. It is expected to become fully self-sufficient by 2030.

In or Out?

Without the benefit of a crystal ball, nobody can say for certain whether the UK will still be in the EU come June 24, with the opinion polls seemingly fluctuating by the day. However, there are more questions than answers as to how the UK's legal relationship with the EU will look after its withdrawal is negotiated, should the nation vote out. Expats on both sides of the English Channel are therefore likely to experience at least some upheaval in the event of a Brexit.

Tags: agreements | interest | Pensions | Tax | Europe | Pensions | retirement | pensions | Germany | Italy | Spain | Switzerland | Ireland | United Kingdom | standards | legislation | law | services | environment | tax | social security |


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