UK pension deficit could increase by £219bn in a hard Brexit

Turmoil at Westminster in the wake of the Conservative Party leadership challenge has heightened the risk of a no-deal Brexit.

Cardano’s risk modelling shows that a hard Brexit could trigger a 14 per cent rise in aggregate UK pension liabilities, driven by the impact of falling gilt yields, failing interest rates, weakened sterling and a corresponding rise in inflation on schemes’ long-term pension obligations.

A hard Brexit scenario could drive a 6 per cent rise in UK pension fund assets on the back of currency tailwinds; the potential fall in sterling would be positive for the international constituents of the FTSE 100 and indeed for schemes’ allocation to global equity and debt.

However, this potential improvement would be outweighed by the 14 per cent rise in liabilities, thereby widening the UK’s aggregate funding gap.

Conversely, Cardano found that a soft Brexit scenario could cause the UK’s aggregate buy-out deficit to fall by £138bn, a 24 per cent reduction from current levels, driven principally by a 9 per cent fall in liabilities, easing the funding challenge for scheme trustees and corporate sponsors across the UK.

With some of the major uncertainties of the UK’s future relationship with the EU removed, a more favourable Brexit would enable growth to improve and, with limited slack in the British economy, could increase the pace of Bank rate hikes, strengthen sterling, push up gilt yields and soften the performance of the FTSE 100.

Kerrin Rosenberg, UK chief executive officer at Cardano, said: “We 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.

Cardano advised trustees and their advisers to think about adjusting their investment strategy based on the impact of a hard Brexit on the sponsor. It also recommended that schemes consider hedging interest rate and inflation risk using a liability-driven investments toolkit and limiting the impact of different Brexit scenarios on the growth portfolio through appropriate diversification – aiming to minimise risk in UK assets