Securing EU-member benefits post-Brexit

Post-Brexit, UK law does not prevent employers based outside the UK from participating in a UK-based occupational pension scheme and paying contributions in respect of their employees. Advice should also always be taken as to whether the laws of the non-UK employer also allow this. However, when the trustees of such cross-border schemes look to buy-out the benefits of any overseas members, and the scheme obligation to pay those benefits is not denominated in sterling, they may encounter some unexpected hurdles. 

The legal problem

Before Brexit, UK pensions legislation was drafted such that UK and EEA insurance firms were treated in a similar fashion. However, this is no longer the case.

This has knock-on implications for trustees who may be looking to enter into a buy-in agreement and subsequently buy-out the benefits of any non-UK-based members with an insurer. “Insurance company” and “insurer” are defined under the Finance Act 2004 (“FA 2004”) and the Pensions Schemes Act 1993 respectively as “persons who have permission under Part 4A of the Financial Services and Markets Act 2000 to effect or carry out contracts of long-term insurance”.  It is unlikely, post-Brexit, that an overseas insurer, which is incorporated and authorised in a non-UK jurisdiction (i.e. typically an EU jurisdiction), will have the relevant permissions, unless it has set up a UK subsidiary or a third country branch located in the UK.

As such:

• transferring assets to a non-UK based insurer to represent accrued rights under a registered pension scheme will not be a “recognised transfer” under s.169 (1A) of the FA 2004, meaning the payment will be unauthorised, and
• trustees will not obtain a statutory discharge in respect of liabilities for GMPs or deferred members if they secure those liabilities with an insurer outside the UK. 

The commercial problem

These provisions and definitions cause no issue where a UK insurer is able and willing to secure the benefits of all scheme members, including those based outside the UK. 

However, where you have non-UK based members, a UK insurer may be unable or unwilling to secure their benefits and issue them with individual policies, especially if the transaction is small in size. Furthermore, where scheme rules provide for members’ benefits to be paid in their local currency e.g. euros, we have seen insurers require trustees to purchase a bulk annuity policy from its EU insurer entity, resulting in the legal problems mentioned above. 

Potential solutions

Whilst we have identified a number of potential solutions, none of these provide an ideal answer from the perspective of one or more of the parties involved (trustees, members, insurer). In addition, many depend on the insurer’s appetite for the business and operational flexibility. Potential solutions include:

• securing the EU-member benefits in sterling with a UK insurer and passing the risk and cost of currency conversion on to members.  
• securing the benefits with a UK insurer at the sterling equivalent of the euro benefit amount but with bespoke provisions under the annuity policy which allows the member to direct the insurer to make payment of that amount to its EU insurer to fund payment to the member in euros.  
• have the insurer’s UK entity issue the bulk annuity policy and then set up a reinsurance arrangement with its EU entity so that the EU members can be paid benefits in euros. 
• bulk transfer the EU members to a different EU scheme.  
• re-structure the EU-member benefits under scheme rules so that they are paid in sterling.  

Future solutions

Given that HMRC allows overseas employers and members to participate in a UK registered scheme, and indeed allows an overseas scheme to be UK registered, post Brexit there really ought to be, as a matter of policy, a straightforward mechanism which allows for such benefits to be secured.  If nothing else, there ought to be some equivalent to the QROPS mechanism to allow a fully regulated overseas insurer, which is subject to equivalent regulatory capital requirements to a FSMA-regulated insurer, to buy out scheme liabilities on the same terms as provided for under the scheme itself, without risking infringement of UK tax law.

This, and the failure to also consider the preservation and contracting-out laws, is sadly another example of the consequences of Parliamentary Counsel looking to strip out all EU "preferential treatment" in the relevant UK law, without stopping to consider adverse impacts. 

Pending a legislative fix, the appropriate approach will depend on a scheme’s particular circumstances and the parties involved. Tailored advice will be required from the scheme’s legal and actuarial advisers to identify the best available solution. Whilst there may be other solutions than those outlined above these would likely be complex and schemes, sponsors, insurers and, of course, members really ought not to have been put in this position in the first place…