Take a deep breath: Brexit might not change much for schemes

Markets have been volatile since the start of 2016 but Friday saw the biggest fall of the pound since 1985, and the FTSE 100 Index dropped by more than 8 per cent at its peak, ending the day 3 per cent lower. 

Markets are likely to remain unsettled during the period, which could be at least two years, in which the UK will negotiate the terms of its withdrawal.

We need to keep things in perspective. There may not be any major long-term financial or legal impact

However, the Bank of England was quick to provide reassurance, and governor Mark Carney announced it would take “all necessary steps” to support monetary stability, with a £250bn war chest.

Pension funds are by nature long-term savings vehicles. Many schemes will be well equipped to ride the storm, through diversification of assets, hedging and liability-driven investment. This is not the first, and will not be the last, market turbulence that pension schemes have faced.

For schemes not so well protected, let this be a wake-up call to consider the implications of the referendum on their investment strategy.

In the long term, the impact on pension scheme funding will depend a lot on the value of gilt yields and whether they rise, as expected, faster than the market assumes. That would be good news for pension scheme funding.

Legislation 

Much of the UK legislation affecting pension schemes has its roots in the EU. The directive on Institutions for Occupational Retirement Provision, which deals with funding, investment and governance, is one of several EU directives that have been incorporated into UK legislation.

The financial sector is also extensively regulated through EU legislation such as Emir and MiFID II.

While it seems likely that equivalent legislation would remain in place in the short term, this will ultimately depend on the relationship agreed between the UK and the EU and the political appetite here to dispense with or amend existing UK legislation.

We may not see much change, not least because some level of compliance/harmonisation will most likely be required by the EU as part of the negotiated terms. So, no need to panic here. It is even possible that the vexed issue of guaranteed minimum pension equalisation may be axed as a result of Brexit.

Employer covenant

The changing trading environment following Brexit could have an adverse impact on the business of sponsoring employers. But much will depend on the nature of the employer’s business, in particular its exposure to EU trade, and its ability to trade with non-EU countries.

The effect of any covenant deterioration on a pension scheme will depend on the volatility of the scheme’s investment strategy. So again, we should see Brexit as a wake-up call to schemes that are overly exposed.

Impact on members

Finally, let’s not forget pension scheme members. Following weeks of propaganda and scaremongering, many may be relieved to hear that the Brexit impact on their occupational pensions may be less than feared. 

The benefit promise of defined benefit schemes remains unchanged, although funding deficits may be bigger. In the case of defined contribution schemes, you would expect a default lifestyle strategy to have already transitioned anyone close to retirement away from risky assets and the volatility of Brexit.

Brexit may have been a humongous shock to the system, but we need to keep things in perspective. There may not be any major long-term financial or legal impact.

We should not let it detract from the main challenges at hand – for DB, paying pensions as they fall due, and for DC, ensuring schemes are well governed, and offering the best choices and value for members. In short, let’s keep calm and carry on. 

Caroline Legg is a partner at law firm Sacker & Partners