Britain’s vote to leave the EU has raised some big issues for the UK’s pensions industry. The immediate impact has been a worsening of the funding position for most UK defined benefit (DB) pension schemes. In accounting terms, firms reporting at 30 June will, in the main, disclose significantly worsened pension positions. As and when the UK Government triggers the start of the formal exit from the EU we expect to see more volatility. Scheme trustees and sponsors need careful planning strategies to navigate this uncertainty and take full advantage of market opportunities.
The impact of Brexit on a scheme’s employer covenant will vary significantly, as will the cash funding impact. We also expect continued pressure for changes to future benefits for those DB schemes which are still open to accrual, especially where their increased funding costs coincide with a sponsor whose business is taking a hit from the UK’s exit decision.
For defined contribution (DC) schemes whose members are close to retirement and buying an annuity, the risk is that they won’t have time to recover from any adverse volatility, so schemes may need to issue bespoke communications to encourage greater member engagement.
Beyond the very near term, it is not so much the widely-reported fortunes of the FTSE-100 that matter to pension scheme health, but emerging UK monetary policy. That, and investor sentiment towards gilts and sterling-denominated corporate bonds, will have the greatest impact on scheme deficits, company balance sheets and operating cash flow. At this stage, both are unclear and could impact significantly to the upside or downside.
Now is not the time for knee jerk reactions, but the time to identify the key risks and themes and to monitor these as the timing, process and implications of Brexit become clearer. Each situation will vary and stakeholders need to start to understand what is most likely to impact them. It is time to scenario plan.
At the KPMG EU Referendum Forum we share: