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Expat Briefing Editorial Team, 09 July, 2013
Many British expatriates living in the European Union have financial worries enough on their plates at present, what with the weak pound having eroded the value of salaries and pensions, economic instability depressing property values and cash-strapped eurozone governments dreaming up new ways to tax them. Talk of the United Kingdom exiting the EU within the next few years is probably the last thing they want to hear.
Given that the EU now exists to facilitate the free movement of people and capital around Europe, the impact of such a large Member State leaving it – and presumably the Single Market as well – would affect millions of people. It is estimated that in 2010, around 1.4 million UK nationals were resident in other EU Member States, with the largest numbers estimated to be in Spain (411,000), Ireland (397,000), France (173,000) and Germany (155,000). There are also 1.4 million non-UK EU nationals who work in the UK representing 5% of the country’s total labour force.
The potential consequences of the United Kingdom’s withdrawal from the European Union have now been laid bare in a new report by the UK Parliament’s Commons Library. Entitled “Leaving the EU,” it is an overall assessment of what a ‘Brexit’ would mean for the UK and for British nationals. Here we concentrate on the consequences of a UK-less EU for expat 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 agreed 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 having been negotiated by the British Government, the report warns that UK nationals who had spent periods living and working abroad could have their pension rights “significantly reduced."
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.
However, the report cautions that current bilateral arrangements with particular countries are "far more limited in scope," than the EU coordination rules, and that no new agreements have been signed for many years.
“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,” observes the report. “The UK might not be able to extract terms favourable 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 observes, 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.
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 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. 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.
This legislation also establishes prudential standards to ensure that members and beneficiaries are properly protected, as well as requirements concerning the disclosure of information. Withdrawal from the EU would remove a mechanism by which the funding of cross-border schemes is ensured, as well as pension protection in the case of employer insolvency, the report warns.
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 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 Directive provides 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 2004 to provide compensation to members of schemes that started to wind up underfunded from 6 April 2005, is now described as “well established.” The PPF protects more than 360,000 people who might have otherwise lost their pensions, and had a surplus of almost GBP1.07 billion at 31 March 2012. It is expected to become fully self-sufficient by 2030.
How Close Is The UK To Leaving The EU?
If put to a referendum tomorrow, the likelihood is that a comfortable majority would vote for the UK to withdraw entirely from the EU. Indeed, the most recent Ipsos MORI poll on the subject, conducted in November 2012, concluded that only 44 percent of respondents supported remaining in the EU, with 48 percent against.
Prime Minister David Cameron has promised that should the Conservative Party win an outright majority in the next election, there will be a referendum on EU membership by the end of 2017 following a renegotiated "new settlement" for the UK. In the meantime, he has given his support to a private member's bill on a referendum, currently being introduced by Conservative MP James Wharton. However, the many Conservative backbenchers who support Wharton’s initiative want a straight “in/out” vote. So the Government’s position is far from clear.
In a sense, the referendum, if politically complicated for the main political parties, is the simple part. But the uncertainties that would flow from it, should Britons vote to turn their backs on the EU, would be manifold, as the Commons’ report attests. What is fairly certain is that the UK will have a lot of negotiating to do.
Article 50 of the amended Treaty on European Union (TEU) allows a Member State unilaterally to leave the EU in accordance with its own constitutional requirements. The Treaty states that: “A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union.”
Sounds quite straightforward, doesn’t it? Well actually, EU withdrawal is going to be far from easy. As the Commons’ report notes, for starters, the extent to which UK and other EU citizens might have vested rights stemming from the UK’s EU membership “would have to be addressed.”
On an economic level, if the UK chooses to stay part of the Single Market, it will have to retain many EU laws underpinning the free movement of people, capital, goods and services. Conversely, if it chooses to go it alone, Britain will have to negotiate new trade and economic relationships with the EU. This will obviously be a time-consuming task, and it could also have a huge impact for British people living in other member states if they eventually become subject to new immigration, residence and employment rules (and vice versa for EU migrants in the UK). It is also likely that the rules surrounding social security contributions and entitlement, healthcare and pensions for expats would be affected by the UK’s withdrawal from the Singe Market.
Complicating the matter further is that, as a member of the EU, the UK has many treaties and agreements with third countries, and these would also have to be renegotiated.
Additionally, while the UK has long complained about giving financially to the EU without getting much back in return, the reality is that there are likely to be numerous projects underway all over the country which are being back by EU grants. While a percentage of this may well have originated from the UK in first place, it highlights the fact that the UK has a complex financial relationship with the EU. More fundamentally, the EU budget for the next few years will already have been planned on the basis of the UK being in it. So there will have to be long hours of talks between London and Brussels, as well as the other Member States, to ensure that the UK’s financial accounts are settled in the best interests of all.
Above all though, nobody can be sure what will happen if the UK does decide to withdraw, as there is no precedent for a Member State having left the EU.
While this is not the place for a detailed exposition of the rights and wrongs and the whys and the wherefores of the UK’s EU membership, this summary does serve to highlight that Britain will not be in a position where it is in the EU one day, and suddenly out of it the next. Moreover, there is no guarantee that a referendum will actually take place, because it depends on a Conservative election victory in 2015. The opposition Labour Party for their part have consistently dodged the issue of an EU referendum (mainly because they are a europhile party, and public opinion is against them) but it is highly unlikely there will be one if they win in 2015.
Without the benefit of a crystal ball, nobody can say for certain whether the UK will still be in the EU in say five to 10 years’ time. There are also more questions than answers as to how the UK’s legal relationship with the EU will look after its withdrawal is negotiated. However, expats are likely to experience at least some upheaval after the Brexit.
For an overview of the existing pension rules for EU nationals, the European Union provides a web page explain some of the rules surrounding state pensions, private pension rights, taxation and other issues. Also, our partner websites, Investors Offshore and Lowtax contain a great deal of useful information with regards expat pension issues and personal taxation in dozens of jurisdictions around the world.