Why Staying In the EU Could Scupper UK Pension Innovation

A warning has been sounded ahead of an expected in/out referendum in 2017.

There are “nasty surprises” ahead for UK public sector pensions if the country remains in the European Union (EU) beyond 2017, a lawyer has warned.

Prime Minister David Cameron has promised to renegotiate the terms of the UK’s membership of the union before calling an in/out referendum on EU membership in 2017.

“There are some nasty surprises waiting for the government if the IORP directive does apply.” —Clifford Sims, Squire Patton BoggsAn exit would cause major disruption for the financial sector as well as high levels of uncertainty and volatility in markets, commentators have predicted. However, Clifford Sims, partner at Squire Patton Boggs, told a session of the National Association of Pension Funds’ Local Authority Conference that remaining in the EU would also pose serious problems, particularly to the establishment of common investment vehicles (CIVs) for public pensions.

The problems centre on the 2003 Institutions for Occupational Retirement Provision (IORP) directive.

“There are some nasty surprises waiting for the government in there if the IORP directive does apply [to public funds],” Sims said. “The directive says member states shall not subject the investment decisions of institutions or its investment managers to any kind of prior approval or systematic notification requirements. There is also a provision which says member states shall not require institutions located in their territory to invest in particular categories of assets.”

Sims said the interpretation of these provisions was uncertain, but it would certainly affect the UK government’s desire for public sector pensions to pool resources. London’s 33 local authority pensions are already working on CIVs for shared mandates, with the first investments slated to go live later this year.

In addition, there are several areas of investment rules within the IORP directive with which local government pension funds do not comply, Sims said.

“There are various provisions in [LGPS] rules which do not comply expressly with the IORP directive,” he said. “For instance, in IORP you have to invest with a view to liquidity, security, and profitability—those technical principles are not incorporated at all into the LGPS investment regulations.”

“There will be at least one poll that will show a majority wants to leave the EU, and that will put uncertainty into the financial markets.” —David Page, AXA IMThe UK government has cited Article 5 of the directive as a get-out clause, as it states that if a guarantee is in place then an EU member “may choose not to apply” some parts of the directive. However, there is no legal agreement that Article 5 applies to UK local authority pensions.

Meanwhile, David Page, senior economist at AXA Investment Managers, and Phil Triggs, strategic finance manager at Surrey County Council, both warned of the significant and wide ranging impact of a UK exit from the EU.

Page said AXA had reduced its growth forecasts for the UK for 2016 due to the uncertainty the impending referendum would introduce to UK businesses. Deutsche Bank this morning confirmed it would switch areas of its UK business to Germany if an exit was confirmed.

“I’m pretty certain there will be at least one poll that will show a majority wants to leave the EU, and that will put uncertainty into the financial markets,” he said.

Triggs said an exit was “a considerable risk” as it would require the UK to renegotiate separate trade agreements with non-EU countries. He also warned of a possible exit of Scotland from the UK, and the potential for a full break-up of the union.

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