Brexit and the EU Budget (EUC Report)

Earl of Lindsay Excerpts

Thursday 6th April 2017 Lords Chamber

[The Earl of Lindsay (Con)]

My Lords, I, too, thank the noble Baroness, Lady Falkner, for introducing the report. In so doing, I should record my appreciation for the engaged and effective style with which she chairs the committee and chaired all our witnesses. I will also take this opportunity to thank the clerks, the policy adviser and our support team.

We have heard that the report looks at the financial issues that will have to be addressed in the negotiations when seeking a Brexit settlement. In particular, as has been explained, the report seeks to explore the certainties and uncertainties that attach to those issues, and how they might be addressed and calculated.

Before I look at one area of uncertainty, I should remind noble Lords that there is a fundamental question which it would sensible for the UK and EU negotiating teams to consider before detailed discussions begin. After the contribution from the noble Lord, Lord Thomas of Gresford, it could perhaps be called the Reform Club question. The question is well articulated in the title of the recent publication by the Bruegel think tank, to which the noble Lord, Lord Butler, referred: Divorce Settlement or Leaving the Club? A Breakdown of the Brexit Bill. At the beginning of its text, the report expands on that question as follows:

“The key question is whether one considers Brexit to be a cancellation of a club membership or a divorce. In the former case, the UK would have no claims on any EU assets but would still need to pay its outstanding membership fees. In the latter case, both assets and liabilities would have to be split”.


Every pronouncement from leading EC and EU figures since last June’s referendum suggests that they have been determined from the outset to see the Brexit negotiation as a divorce settlement. Their focus appears, from their public utterances, to have been on what share the UK owes in terms of EU liabilities. For whatever reason, they appear to have given no consideration to the possibility that treating the Brexit negotiation more as the cancellation of a club membership than a divorce settlement might avoid many months—possibly years—of detailed wrangling over the complications that come with striking an agreement on the UK’s share of the EU’s assets and liabilities.

It might be a better direction of travel for both the UK and the EU to see this as a cancellation of a club membership—or it might not, but at the very least the option should be considered, in case it has merits and serves both parties’ interests. I would be interested to hear from my noble friend whether Ministers accept that the Brexit settlement will be treated as a divorce settlement or whether alternative approaches could be on the table.

One of the complications that our report considers, which has already been referred to in this debate, is in respect of pensions and how the UK’s share of pension liabilities might be calculated and allocated. As we heard from the noble Lord, Lord Butler, in the EU’s 2015 annual accounts, accrued pension liabilities were shown at a capitalised figure of €63.8 billion. This raises two key questions: first, is the UK under a legal obligation to make a contribution towards those long-term pension liabilities; and, secondly, if it is, how should the UK’s share of this €63.8 billion be calculated?

A number of our witnesses appeared to be very confident that it is an unavoidable and enforceable obligation on the UK that we will have to meet. Their focus was on the different ways in which the UK’s contribution should be calculated. A range of propositions was suggested to us: for instance, that it should be based on the UK’s contribution to the EU budget, either with or without the UK rebate being taken into account; or that it should be based on the past and present numbers of UK nationals employed in EU institutions; or that it should be based on the proportion of those in receipt of an EU pension who are UK nationals; or that it should be based on the UK’s share of the EU population. In other words, among all those witnesses who agreed that there was a binding obligation on the UK to make a contribution to accrued pension liabilities, there was no agreement on the right methodology to calculate that contribution.

Beyond that, there were also differing views on how EU enlargement over the years of the UK’s membership could be overlain on some of those methodologies, and there were queries about the actuarial and accrual accounting methods that had been used to calculate the €63.8 billion capitalisation of the long-term pension commitments.

Other witnesses challenged the assumption that the UK is legally liable for a share of accrued pension liabilities, especially those liabilities not falling due until after the date when the UK ceases to be a member of the EU. They also offered us a range of propositions to support that view. For instance, it was pointed out that pension liabilities, unlike other member state budgetary liabilities, relate to rights that are accrued by individuals through their service in European institutions; that the nationality of employees or pensioners is irrelevant; and that the legal responsibility for meeting those pension entitlements clearly rests, in the first instance, with the employing European institutions and thereafter with the EU, with member states acting as guarantors—but a member state cannot be retrospectively liable as a guarantor after it has ceased to be a member state. We also heard that the UK might claim that it had overcontributed to EU pensions over the years of its membership.

From the conflicting views and evidence that the committee received, it is difficult to conclude that the UK is subject to a clear-cut and unarguable legal obligation to make a contribution either towards accrued long-term pension liabilities as part of a Brexit divorce settlement or to any continuing enforceable post-Brexit liability for accrued pension entitlements thereafter.

It was put to us that, regardless of any uncertainties around the legal position, the UK is none the less under a moral obligation on both counts. Once again, the evidence we heard was conflicting and suggests that this may be one of those moral obligations that is in the eye of the beholder, compelling to some but unseen by others. In other words, if the UK is subject to a moral obligation, like the legal position it is not clear-cut.

However, regardless of the differences of opinion on whether or not a solid legal or moral obligation exists, there was perhaps a greater consensus around the view that the UK will very likely be under a strong political obligation to address expectations around EU pensions. If, as we have heard, the UK wants a Brexit deal that achieves a new strategic partnership, beneficial trade arrangements, future UK participation in EU programmes and, as my right honourable friend the Prime Minister said and the noble Baroness, Lady Falkner, quoted,

“a new deep and special partnership”,

it is difficult to contemplate those objectives being achieved without the UK being prepared to come to some agreement with the EU on pension liabilities.

At the same time, if the obligation to reach a deal on pensions is largely political and the Brexit negotiations descend into territory that either could be called a bad deal or that raises the prospect of no deal, the UK may indeed be able to disregard the need to reach that agreement on pensions and to avoid any gesture or contribution towards long-term liabilities.

The EU negotiators may disagree with that scenario and claim that they have both the law on their side and access to the jurisdiction and enforcement processes post Brexit that will enable them to compel the UK to honour its share of accrued pension liabilities. They may be right—but, on the balance of the evidence taken by the committee, there have to be doubts about whether such confidence would be well founded.

This leads me to offer the following conclusions, which are very much in line with what the noble Baroness, Lady Falkner, said in introducing this debate and the comments of the noble Lord, Lord Butler, about the sense of a reasonable agreement being reached and the benefits that will accrue to both sides of the negotiation. If the UK wants a good Brexit deal, it must be ready to contribute to the EU’s pension liabilities, regardless of the fact that the UK may not be under a legal or moral obligation to do so. Equally, if the EU wants the UK to contribute to the EU’s accrued pension liabilities, the EU must be ready to address what the UK is seeking from the rest of the Brexit negotiations. If both parties approach the negotiations with that mindset, I do not see pensions necessarily holding up the Brexit discussions.

There is one other way to avoid pensions becoming a time-consuming blockage in the negotiations—and this goes back to the Reform Club question. It is to treat pensions within the negotiations as being a resignation of membership issue rather than a divorce settlement issue.