For many businesses observing the Brexit negotiations, one of the issues will be only too familiar: if you have a defined benefit pension scheme, how do you calculate your share of pensions liabilities?
For any UK business running a defined benefit pension scheme, pension liabilities can have a significant impact on the business itself and on a potential sale, acquisition or restructuring. Now, they are at the heart of negotiations between the UK and the EU.
Brexit negotiations: round four
The fourth round of Brexit negotiations took place from 25 to 29 September 2017. One of the main issues on which the EU is looking for progress before it concludes that ‘significant progress’ has been made and that talks can move on to future trade, is the financial settlement that will form part of the withdrawal agreement – the so-called ‘Brexit divorce bill’.
In her speech in Florence earlier in September, Theresa May confirmed that the UK would honour financial commitments made during the period of our membership of the EU. However, in his closing speech at the end of the fourth round of negotiations, David Davis confirmed that the UK is still considering what these commitments are: “we are not yet at the stage of specifying exactly what these commitments are. That will need to come later”.
One area that the EU sees as being part of the UK’s commitments is liabilities relating to the pension scheme for EU officials. Reports suggest that, in 2016, the liabilities for this scheme rose by 5% to €67 billion. It seems clear that the EU is seeking a contribution towards these costs from the UK. However, this raises a number of questions. Should the UK pay something towards these pension costs? If so, which liabilities should it contribute to and for what period? Should this be the liabilities relating to UK members and pensioners only, or a percentage of the total liabilities in the EU scheme? If the UK contributes, how should any money be used? Should it be used to set up a separate fund for UK members and pensioners, or to help to meet the costs of the existing scheme? More generally, should action have been taken before now to increase member contributions and or reduce the level of benefit provided?
These points aside, there is the thorny question of: how the pension liabilities should be calculated and what assumptions should be made. Underlying these questions could be any number of variables. For example: the demographic make-up of the workforce; life expectancies (should account be taken of any differences in life expectancy as between Member States?); and future economic outlook for the UK and EU (what we might recognise as covenant strength). Such assumptions are often open to more than one interpretation and reaching agreement may not be a straightforward process.
Osborne Clarke comment
The next round of Brexit negotiations began today, 9 October 2017. The mood music from the last round of talks was more positive than it had been before. However, when it comes to the details, such as the fairest approach to pension scheme liabilities, there could be a lot of ground to cover.
The questions raised by the EU pension scheme are similar to the ones that businesses grapple with day to day. Our team of UK pensions experts can help with questions relating to liability management, and the pensions aspects of sales, acquisitions and restructuring. If you would like to discuss any of these areas, please contact one of the experts listed below, or your usual OC contact.