How will annuity providers be impacted by Brexit?

22nd March 2019

This article was first published on Lexis®PSL Pensions on 12 March 2019.   Click for a free trial of Lexis®PSL.

Annuities are financial products which are provided by insurance companies. The insurance sector is part of the financial services sector.  This sector as a whole is very highly regulated and, at present, the majority of the UK’s financial services legislation derives from EU law.

Broadly speaking a financial services firm (including an insurer) which is authorised in any European Economic Area (EEA) country may carry out its activities in any other EEA country through a process known as “passporting” as a result of their EU authorisation (or similar arrangement).

The UK’s proposed Withdrawal Agreement provides that during the transition period the UK would continue to be treated as if it was a Member State except in relation to participation in EU institutions. This means that if the Withdrawal Agreement is approved by Parliament, annuity providers would not immediately be impacted by Brexit.  They would have the transitional period to obtain any authorisations necessary or to take any other appropriate steps to ensure the smooth continuation of their business post-Brexit.

If there is a “no deal” Brexit, the European Union (Withdrawal) Act 2018 incorporates the whole of EU law into UK law with effect from 29 March 2019. This Act also gives the Government the power to amend UK law to ensure that there is a fully functioning financial services regulatory regime on Brexit.

The Government has confirmed that it intends to introduce a temporary permission regime to allow EEA firms to continue to operate in the UK for up to three years post-Brexit whilst they apply for full UK authorisation. UK firms’ position in relation to operating in the EU would be determined by relevant Member States and applicable EU rules that apply to non-EEA countries.

Has the government taken any steps to ensure annuitants living in a Member State can continue to receive UK annuity payments?

The Government has acknowledged that annuitants who live in the EEA may lose their ability to receive their annuities in the event of a “no deal” Brexit. This is because UK firms will lose their passport to operate in the EEA which in turn may affect these firms’ ability to continue to provide their services.

In guidance (updated on 8 January 2019) the Government stated that it was committed to taking unilateral action, if necessary, to resolve issues for annuitants living in EEA states as far as possible on the UK side. However the Government acknowledges that its own unilateral action is not sufficient to address the risks to EEA annuitants of UK firms currently providing services into the EEA using the current passport system.  The Government comments that it is committed to working with EU partners both to identify and address the risks.

It is important to note that this guidance does not apply to UK citizens living in EEA countries who are in receipt of the State pension. The Government confirmed in guidance (updated on 15 February 2019) that Brexit will not affect anyone’s entitlement to receive the State pension. The Government is also committed to uprating the State pension across the EU until 2020.  Any uprating beyond 2020 will depend on whether or not reciprocal arrangements are in place with the EU.

Are these steps sufficient?

It is helpful that the Government has issue the guidance which it continues to update. It will be interesting to see how the Government’s guidance is updated in light of the EIOPA’s recommendations published on 19 February 2019. However, it is important to note that the Government cannot act unilaterally, steps must be taken by the EU as well.

Has EIOPA made any recommendations to Member States in this respect?

On 19 February 2019 the EIOPA issued its recommendations for the insurance sector in light of Brexit. These recommendations emphasise the importance of safeguarding policyholders in the event of a “no deal” Brexit.

In some areas the EIOPA has provided specific guidance on the approach it expects individual Member States to take. An example of this is that UK insurers should not be allowed to write new insurance contracts in the EEA (including renewals, extensions or increases in cover) without being EEA authorised (paragraph 16 of the EIOPA recommendations).

At the same time it is helpful that the EIOPA has acknowledged the position of annuity policies and annuitants. Paragraph 16 of the EIOPA recommendation specifically provides that whilst UK insurers are not allowed to write new insurance contracts etc, policyholders who exercise an option or a right in an existing policy to start taking their pension should not be prejudiced.

It is important to note that the EIOPA recommendations which apply from the time the UK leaves the EU, are not binding. The EIOPA has given national regulators two months to state if they will comply with each recommendation or explain their non-compliance.  This two months take us past the current Brexit date of 29 March 2019.

It is helpful that the EIOPA has issued these recommendations. However, it would have assisted both the insurance industry, and annuitants, if these recommendations had been published earlier.