How European pension coordination works and what changes for the UK
A cornerstone of EU free movement rules, the coordination of state pensions allows people who move around the countries of the European Union, as well as Iceland, Liechtenstein, Norway and Switzerland, to contribute only into one system at the time and aggregate the contributions paid into different systems when retiring.
This is one of the many areas that will be impacted by Brexit, as the UK will no longer be part of this common social security area after leaving the EU. What will change for people who have moved between the UK and the EU before Brexit, and for those who intend to move afterwards? Adrian Berry, a barrister at Garden Court Chambers in London who specialises in EU free movement, discusses with Europe Street.
How does the UK state pension work?
Entitlement to a UK state pension depends on a person’s national insurance contributions. At present, 10 years of national insurance contributions are required to be eligible for the UK state pension. However, the UK also participates in the coordination of EU pension arrangements that allows adding together periods of insurance in more than one EU state. So time spent in another EU state may be used to make up the qualifying years. For example, five years working and being insured in the UK, together with five years working and being insured in Italy before moving to the UK, would ensure entitlement.
What about the other way round, moving to another EU country? How do pension rules work in EU countries?
Each country makes its own rules for state pensions and the criteria for entitlement vary. Each country’s criteria must be satisfied before any entitlement to its pension arises and pension coordination becomes possible. For example, compared to the UK, longer periods of contributions (20, 35 or even 40 years) may be required in Italy. This means that the entitlement to an Italian state pension may arise after far longer. The rate at which these pensions are paid out is also determined by Italy under its own rules.
What do people have to satisfy to aggregate the contributions they have paid across countries?
A person need only make one pension application in the EU country in which they live or they last worked. In the UK a person applies for a pension to the International Pension Centre (IPC). The role of the IPC includes contacting the other EU states where the person has worked (or has been otherwise insured). Each state has to work out its contribution to the pension that is to be paid. A similar role is fulfilled in other EU countries by the relevant social security institutions.
How is the amount of an aggregated pension determined?
The actual amount paid out by the UK state pension is based solely on the UK contributions on a pro-rata basis, and the same for other EU countries. In our examples, under UK law, a person who has worked for only 5 years in the UK would only get 5/35ths of the UK state pension (35 is the number of years to be worked for a full pension). That is not very much money. He or she would need then to look to the Italian pension entitlement to see how much that would pay pro-rata. In the reverse situation, an Italian citizen in the UK would need to know whether they can use the time working in the UK to build a qualifying entitlement to an Italian pension and at what rate the Italian pension would pay out.
Are pensions coordinated for non-EU nationals who have moved across the European Union, Iceland, Liechtenstein, Norway and Switzerland?
Coordination provisions are extended to certain third country nationals, essentially those working under the conditions of EU regulation 859/2003. Another regulation (1231/110) extends coordination provisions in other EU states to certain economically inactive third country nationals not otherwise covered, for example those entitled to a pension from an EU state may receive it while resident in another EU state and thereby become entitled to free healthcare there. However, the UK has opted out from regulation 1231/10 and never applied it, and the agreement on the UK withdrawal from the EU now reflects that position.
Is it possible to receive state pensions abroad?
The UK state pension may be paid to people living outside the UK but it is only uprated (increased in line with increases paid to those living in the UK) if that person is living in another EU state, Iceland, Liechtenstein, Norway and Switzerland, or in a state with which the UK has a reciprocal agreement. Thus, there are people receiving UK state pensions in countries outside the EU, where their pension entitlements do not increase in line with the increases given to those living in the UK. This can lead to poverty for those affected as the cost of living increases over time while their pension does not. Similar rules apply in some other EU countries. [The UK government announced on24 January 2020 that UK nationals living in the European Economic Area or Switzerland by 31 December 2020 will get their UK state pension uprated for as long as they continue to live there].
Will pension coordination continue after Brexit?
The draft EU-UK withdrawal agreement preserves the current EU arrangements for those who fall within its scope at the end of the transition period (31 December 2020) to the extent specified in that agreement. But for persons moving for the first time between the UK and the EU after the end of the transition period, pension rights will be subject to any future agreement between the UK and the EU (if there is one). The Political Declaration accompanying the draft withdrawal agreement does not provide any detail as to the ambition for future pension arrangements for persons not covered by the withdrawal agreement.
Who is covered by the withdrawal agreement?
Under the withdrawal agreement more people are covered than you might expect. Inclusion is not simply about a person’s status but about whether they have been subject to social security legislation in the state in question. The people who are covered are, firstly, EU citizens who are insured under UK legislation at the end of the transition period, as well as their family members and survivors, and UK nationals who are insured under the legislation of another EU state at the end of the transition period, as well as their family members and survivors. These criteria are not tied to being resident in any particular country.
In addition, EU citizens who reside in the UK but who are insured under the legislation of another EU state at the end of the transition period are also covered, as are their family members and survivors. And the same for UK nationals who reside in another EU state and are insured under UK legislation at the end of the transition period.
Now it starts to get complicated. Also covered, are EU citizens who pursue an activity as self-employed or employed in the UK at the end of the transition period and who are insured under the legislation of another EU state, as well as their family members and survivors. And the same for UK nationals in the same situation in another EU state. This concerns, for example, people who are posted from state A to state B and work not more than 24 months in state B. In that case, the person remains insured in state A. There are other exceptions. For example, where a person works in two or more EU states.
Also covered are people who have not exercised rights of free movement provisions as EU citizens or their family members: stateless persons and refugees residing in the UK or another EU state who are in any of the described situations.
Further, nationals of non-EU countries, as well as their family members and survivors, are covered provided they satisfy the conditions of regulation 859/2003, but are not if they are economically inactive.
Is there any gap in the withdrawal agreement that could put pensions at risk for some categories?
All the mentioned persons are only covered under the withdrawal agreement so long as they continue to be in one of the described situations involving boththe UK and another EU state at the same time. Thus, it is possible to fall outside of the cover offered. For example a person must be insured in one country and staying or residing in another country where co-ordination entitlements arise for the withdrawal agreement to be engaged.
Any person who does not or who no longer falls within the social security provisions, but who falls within Article 10 of the withdrawal agreement is also covered (as are their family members and survivors). Article 10 refers to the categories of persons who have rights of residence under the withdrawal agreement. However, this does not extend to stateless persons, refugees, and third country nationals who are not family members of EU citizens.
In the UK the reference to Article 10 presents a problem. As is known, the UK’s settled status scheme is broader in scope than the provisions of the withdrawal agreement in the granting of residence rights to EU citizens and their family members. For example, a person who has been economically inactive for five years does not have to show that she held comprehensive sickness insurance in that period in order to qualify for settled status. But such a person will still have to show that she held comprehensive sickness insurance during any periods she seeks to argue that she was in the UK as a self-sufficient person if she wants to secure rights relating to the coordination of social security, healthcare, and pensions.
Furthermore, the UK may not, unilaterally, be able to say that such a person falls within scope of the withdrawal agreement for social security purposes, as this may trigger obligations on or disputes with other states involved in the coordination of her rights. Thus, a person with UK settled status based merely on five years’ presence may still be excluded from social security coordination provisions under the withdrawal agreement unless she can show prior exercise of EU rights.
What happens if after the transition period there isn’t a new EU-UK agreement?
If there is no UK-EU future status agreement to cover the period after the transition, there would be a no-deal Brexit at that point. Those persons covered by the withdrawal agreement by that date would be unaffected. But persons moving from the EU to the UK or vice versa for work for the first time from 2021 onwards would fall out of the reciprocal co-ordination system for social security, healthcare, and pensions and have no provision at EU level, although old bilateral treaties between the UK and other individual states may apply. But there could also be consequences for the uprating of pensions.
Moreover, in a no-deal scenario, there will not be, as now, an Administrative Commission to oversee the working of the co-ordination of social security, pensions and healthcare. Nor will there be as now access to the Court of Justice of the European Union to resolve disputes on cross border issues. There will also be no information sharing between the UK and other EU states, so the burden of proving entitlements will falls on individual persons affected. The critical issue is that co-ordination of social security, pensions, and healthcare is a cross-border problem that the UK cannot solve unilaterally.
What are the bilateral arrangements that pre-date the EU?
The UK has old reciprocal arrangements with some but not all EU states that in a No Deal situation would come back into play. These reciprocal arrangements are regulated in UK law by section 179 of the Social Security Administration Act 1992. There is such a reciprocal arrangement between the UK and Italy, for example, dating back to 1953. That Convention only governs the situation for those insured under the legislation of the UK and Italy, it does not cover UK nationals and Italian citizens for any time they were insured under the laws of other EU states. It also lacks a proper surveillance authority and has a cumbersome dispute resolution mechanism.
What about private pensions?
Private pensions are not the subject of the withdrawal agreement, although they may be affected by some of the agreement’s terms (for example on non-discrimination). Anyone with a private pension should be careful to consider its terms and whether it makes a difference if a pension is paid to a resident of a non-EU state.
Many UK nationals have applied for citizenship in other EU countries since the Brexit referendum to maintain the right to move freely in the EU. Does this solve the problem when it comes to pension and social security coordination?
No. Pension and social security entitlements depend on what national insurance contributions have been paid, in which country, and on what entitlements arise as a result. They do not depend on nationality. An Italian in the UK who becomes a British citizen faces the same problems as one who does not, and vice versa.
Claudia Delpero © all rights reserved.
Image by Nattanan Kanchanaprat from Pixabay.
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