In this blog, Phil Cuddeford takes a look at what the effect of Brexit could mean for DB pensions that you sponsor.
David Cameron has promised us a referendum on EU membership, and there is speculation that it could happen as soon as this June. Polls are dangerous but at the moment I certainly wouldn’t be betting my house against a Brexit outcome.
I’m not going to talk about what a Brexit would mean for the UK economy and the general health of UK plc, as no one really knows. But here are some thoughts on what it might mean for the DB pension you sponsor.
First of all, irrespective of the ultimate result, market and funding level uncertainty are only going to increase over the next few months. This will be an issue where you have any snapshot dates coming up soon, including funding valuations, year-end accounting dates, investment triggers based on funding levels and returns and so on.
Secondly, some have argued that UK government borrowing costs would increase in a post Brexit world. If that happened, all else equal, assessed pension funding levels would improve for most because liability values go down when bond yields go up. It also means that bonds would be cheaper. If you thought this is likely, then it might mean that you choose to delay derisking actions, such as buying bonds to replace shares, although you’d want to recognise the risk that things could swing the other way and get worse.
Thirdly, it could mean that the UK would no longer be forced to adapt its pension laws in line with the EU, although this does depend on the terms of the exit. This could be a huge relief to sponsors, as the spectres of “holistic balance sheet” and “IORP II” would have provided yet further pain to UK DB sponsors through onerous disclosure and governance increases, plus the nagging threat of insurance company style funding requirements.
So would a Brexit be good news for UK Plc from a pensions perspective? In isolation, quite possibly. I only wish I could be so sure about the wider economic effect.
What can you do about these uncertainties now? Two things:
- Talk to your investment consultant about mitigating pre-referendum volatility;
- Make sure any decisions (on derisking, valuation funding and so on) due over the next few months are considered in the light of these risks.
Click here to watch our webinar on-demand 'What would Brexit mean for UK pensions and what can we do to be prepared?'