A hard Brexit scenario could see a £219bn increase in aggregate buy-out deficit of UK pension funds, fiduciary and risk management firm Cardano says.
In the event of a no-deal Brexit, including the extent of any transitional arrangements, UK pension trustees and corporate scheme sponsors must be ready to “react to the consequences” they could face.
The group’s risk model indicates a hard Brexit could trigger a 14 per cent rise in aggregate UK pension liabilities, due to the impact of gilt yields, falling interest rates and weakened sterling. It predicts it could drive a 6 per cent rise in pension scheme assets on the back of currency tailwinds, yet it would be outweighed by the 14 per cent rise in liabilities.
A soft Brexit scenario could see the UK’s buy-out deficit fall by £138bn, a 24 per cent reduction from current levels.
Cardano’s UK chief executive officer Kerrin Rosenberg says Brexit poses a very different challenge to UK pension funds, financial markets at the economy. “Since the EU referendum we have had this political event dominate the markets’ mood and attention – yet the quantum and characteristics of the potential market and economic impacts remain relatively unknown.”
“As our analysis indicates, the risks to schemes’ funding positions should not be underestimated and we would encourage UK schemes to think critically about the scale and scope of risks that Brexit may present and to act now – before it is too late.”
She adds: “As we enter into 2019, Brexit will be just one of the range of risk factors that schemes should be proactively addressing in their portfolio positioning.”
Cardano says trustees and their advisers should consider the following ways to keep the impact of either outcome on investment results limited:
- Adjusting their investment strategy based on the impact of a hard Brexit on the sponsor,
- Hedging interest rate and inflation risk using and liability-driven investment strategy toolikit, and
- Limiting the impact of different Brexit scenarios on the growth portfolio through appropriate diversification, aiming to minimise risk in UK assets.