Possible effects of ‘Brexit’ on pensions for UK nationals living in Italy
In his first words since accepting the result of the Brexit referendum (if you were looking for Italy’s Referendum, click here) on Friday, Mr Johnson wrote in 27th June’s edition of The Telegraph that, “EU citizens living in this country will have their rights fully protected, and the same goes for British citizens living in the EU”.
His column said: “The only change – and it will not come in any great rush – is that the UK will extricate itself from the EU’s extraordinary and opaque system of legislation: the vast and growing corpus of law enacted by a European Court of Justice from which there can be no appeal.”
At De Tullio Law Firm, we have received a number of questions about what effect Brexit might have on pensions of retired UK nationals living in Italy.
Much of UK pension legislation is derived from EU Directives or European Court of Justice decisions. Brexit means such legislation would no longer be subject to European jurisdiction, and the UK Parliament could repeal any law it chooses. Brexit thus enables the UK to amend pension legislation, potentially reducing member protections over time.
For example, in terms of equality, Following the ECJ’s decision in Barber v Guardian Royal Exchange on May 17, 1990, pension schemes were required to equalise the retirement age for men and women from that date. In addition, following legislation implemented under the Equality Directive, any age-related contribution rate structure must fall within narrow statutory limits set out in the Equality Act 2010. In 2015, in a case concerning civil partners, the Court of Appeal held that the survivor’s pension entitlement must comply with the EU law in force during the member’s service, so the exemption in the Equality Act 2010 was compatible with the Directive. This meant that the survivor’s pension could be restricted to the date that the relevant UK law came into force.
Although it is unlikely that equality legislation would be repealed as an immediate consequence of the Brexit, it does mean that the UK courts would have greater interpretative freedom, leading to a possible divergence between EU and UK law over time.
The UK’s long-term savings industry is world-leading and well capitalised so of course it can cope with economic shocks. But that is not the same as saying that Brexit is optimal for either today’s or future pensioners.
Long-term pension investment benefits come from strong economic growth, sustained contributions made possible by high employment levels and stable equity and bond markets. All are put at risk by Brexit. Pension funds are invested in financial markets. The financial markets following the Brexit vote are in a state of uncertainty. Conditions, which I believe, we can expect to continue for some time.
If you unpick the Treasury’s analysis, it’s broadly this: that leaving the EU will cause inflation to rise and this rise will erode the value of state pension increases to the tune of £137 per year, per state pensioner.
However, since 2010, UK state pensions have been pegged to the “triple-lock”. This means that pensions keep pace with:
2) average earnings or
3) a minimum of 2.5 per cent thus ensuring it rises each year.
If prices rise because of inflation, then so will the state pension. However, before the EU Referendum, David Cameron warned that the state pension ‘triple lock’ could be cut if Britain voted to leave the EU.
Perhaps more relevant is how the UK economy post-Brexit will affect private pensions. The Treasury’s analysis estimates that those with an additional pension worth £60,000 could expect to see its value drop by £1,900. Someone aged 50 can therefore expect to be worse off by somewhere between £223 and £335 per annum.
Of course, what the Treasury hasn’t pointed out is that UK pension arrangements and schemes, state and private, are in a state of chaos and every week brings a new casualty to the doors of the Pension Protection Fund.
George Osborne’s statement that, “pensioners who have worked hard all their lives deserve dignity, security and certainty in retirement” is a fine sentiment but far from the reality for most.
So, while I do not think Brexit will immediately make any changes to the UK Pensions regulatory environment, it will give the UK government and courts the ability, over time, to amend those laws that have a European root and that could change the treatment of UK pensions, for citizens resident in the UK and abroad, in the mid-long term.
Post-Brexit, scheme trustees are still bound by the current legislative requirements that are already incorporated in their schemes. Without a pressing reason to undergo the time-consuming and costly process of amendment, I believe change is likely to be gradual and, in some cases, may be impossible, as overriding national pensions legislation would continue to bind trustees and employers, and would not be directly affected by a Brexit. For example, UK legislative protections would continue to safeguard members’ accrued benefits from detrimental changes.
Changes might be seen in the UK courts’, Pensions Ombudsman’s and Pensions Regulator’s interpretation of the legislation, none of whom would continue to be bound to consider the European Court of Justice’s and European Insurance and Occupational Pensions Authority’s interpretation and guidance. However, such differentiation would likely be incremental, at least to begin with.
Brexit, therefore, is likely to usher in a gradual shift rather than a radical about-turn in pension legislation. This being the case, trustees, employers and pensions professionals should be well-equipped to respond, much as they have been to the changes in pensions law over the past few decades. That said, you may wish to check your personal situation with your pension provider.