A Warning from Experts

Experts have warned that should Britain leave the EU with no deal, trustees may cut transfer values to protect defined benefit pension schemes.

A senior consultant at Barnet Waddingham, Malcolm McLean, has said that the most recent estimated figures have correctly predicted an increase in pension deficits with a no-deal Brexit, by billions of pounds. He further suggested that this could have a damaging effect on transfer values.

Mclean, discussing the likely effect further 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."

An analysis from Colombia Threadneedle concluded UK DB schemes would see a deficit increase of £35bn should the UK leave the EU with no deal in place. This would be caused by an increase in liabilities even though UK DB fund’s assets would rise due to investment in non-domestic assets.

According to McLean, a softer Brexit “would bring a degree of certainty to the proceedings, something that markets always like to hear.”

The former pensions minister Sir Steve Webb from Royal London discussed potential counter measures to help the economy recover with the Bank of England cutting interest rates should it see necessity. However, long term effects of this intervention would be felt in interest rates which could drive up transfer values.

Sir Webb further commented: “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 LEBC, believes a rise in transfer values would be in the immediate aftermath of a no-deal Brexit due to weak sterling and low bond yields.

Ingram 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."

Ian Neale, director at Aries Insight pension specialists, cautioned the generalisation across all DB Schemes. He discussed how possible tariffs, dependency on UK economy and the business sector in which the scheme sponsor operates will be substantial for assessing impact of Brexit on different pension schemes.

Neale 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."

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