A no-deal Brexit could widen the deficit in defined benefit (DB) pension schemes, JLT Employee Benefits has said.
At the end of February, the funding position of private sector DB schemes remained largely flat at 95%, up from 93% in 12 months, which saw the deficit fall to £82bn from £107bn, according to JLT’s calculations, which are based on the IAS19 standard accounting measure.
Blue chip schemes are much stronger funded at 98%, up from 97% a year earlier, carrying an aggregate deficit of £13bn. Schemes for workers at FTSE 350 companies are 97% funded, a slight rise on the 96% recorded a year earlier, meaning that they share a £20bn deficit.
So, funding positions have remained steady despite the ongoing uncertainty surrounding the terms of the UK’s departure from the European Union.
Charles Cowling, JLT’s chief actuary, said: “Whatever the outcome of Brexit, the outlook for pension scheme deficits suggests a high risk of more volatility and potentially higher pension deficits.”
There has also been a warning from the Bank of England that a no-deal Brexit would likely push inflation higher thanks to a weaker pound and increased tariffs for selling goods to other countries.
The Bank could respond by lowering interest rates, which have been below 1% since the financial crisis. This would not be welcomed by trustees as it could expand the funding gap in their schemes.
Pension schemes have been de-risking by reducing their equity exposure in favour of assets that offer protection from volatility, such as property, yet they may still be exposed to a fall in interest rates, a rise in inflation or both, Cowling warns.
“Trustees and companies should urgently look at their hedging strategies on interest rates and inflation and check whether increases to the level of protection are now appropriate,” he added.
“Trustees would not gamble pension scheme money on black or red in a game of roulette – I’m not sure that gambling on the next direction for interest rates is any better.”