Leaving the European Union without a deal could lead trustees to cut transfer values to protect defined benefit pension schemes, experts have warned.
Malcolm McLean, senior consultant at Barnet Waddingham, told FTAdviser recent estimates had correctly predicted a no-deal Brexit would increase pension deficits by billions of pounds.
This in turn could have an adverse effect on transfer values, he suggested.
He said: “Crashing out of the EU without any sort of deal would almost certainly increase market volatility and continued uncertainty as to the future direction of travel for the economy as a whole.
“This could impact on gilt yields and inflation expectations, all of which could have a damaging effect on DB funding levels and transfer value rates.
“In a more extreme scenario, trustees could be forced to cut transfer values in the interests of protecting the fund and holding on to the employer covenant.”
According to analysis from Colombia Threadneedle, UK DB schemes would see their deficit increase by £35bn if the UK leaves the EU without an agreement.
This is because while UK DB funds’ assets would rise in a no-deal scenario, as they are invested overwhelmingly in non-domestic assets, liabilities would increase even further.
If, on the other hand, the government agreed to a softer Brexit, schemes could be in line for a £85bn surplus, as liabilities wouldn’t rise as much.
Mr McLean said a softer Brexit “would bring a degree of certainty to the proceedings, something that markets always like to hear”.
He added: “Whether that would in itself materially affect DB fund holdings and ultimately increase transfer values is not absolutely certain, but it could enable a return to the more stable conditions we have seen in this respect previously.”
Counterbalancing this theory is the possible impact of a no-deal on interest rates.
Sir Steve Webb, former pensions minister and director of policy at Royal London, explained that if the Bank of England felt it needed to cut interest rates again to prop up the economy, then this could also affect long-term interest rates, which could drive up transfer values.
He said: “But the impact on the stock market would also be important. If shares also fell then this could also increase deficits, especially for less mature DB schemes.”
Kay Ingram, director of public policy at national firm LEBC, also believes that transfer values generally would rise in the immediate aftermath of no-deal, due to a weaker sterling combined with low bond yields.
She said: “Schemes with assets invested primarily in global equities would benefit from the continued sterling weakness.
“Using this investment dividend to offload future growing liabilities would make sense for schemes with this asset allocation.
“Those schemes with a reliance on UK fixed interest and domestic stocks would see deficits widen but could benefit if the Bank of England responded to this scenario with interest rate cuts and reintroduction of asset purchases.”
But Ian Neale, director at pensions specialist Aries Insight, cautioned against generalising across all DB schemes.
Mr Neale noted that market factors, including possible tariffs, the proportion of scheme investments dependent on the UK economy, and the business sector in which the scheme sponsor operates will be material for the impact of Brexit for pension schemes.
He said: “The general feeling in the industry seems to be that if UK exit does happen, then it is more likely to depress than enhance scheme valuations.”
By Maria Espadinha
Source: FT Adviser