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Hard Brexit could increase pension deficit by 37%

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.

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  1. Prudential’s house view almost from day one has been that the UK will, ultimately, leave the EU without a deal and I have to say that that’s looking increasingly likely. The strategy on both sides is likely to be brinkmanship right up until the 60th minute of the 12th hour. Who will blink first? That said, if the UK Parliament refuses to ratify whatever deal TM manages to negotiate, Brexit without a deal will be the only outcome. Another referendum or staying in without one are simply not options.

    The biggest and most crucial mistake made by the government of the day back in 1974 was agreeing to join the EU without insisting on a clearly defined exit process should we have found that we didn’t like what we’d gotten ourselves into and, if one was not forthcoming, we should never have joined. Had we not done so and the most recent referendum had been about whether or not we should join now, I think the majority vote would have been a resounding ABSOLUTELY NO WAY.

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