Brexit has grown among defined benefit scheme trustees as a perceived investment risk, according to professional trustee company PTL's latest DB survey, as schemes are advised against making wholesale investment changes over the next few months.
The study asked trustees to highlight their top three DB risks. Brexit investment implications have risen to second from third in the concerns of trustees, growing to 13.8 per cent of votes from 11 per cent in September 2017.
Trustees must consider the possibility of slower growth in the UK and abroad, according to experts. There may be some upside for schemes, however.
Should the potential deadline for Brexit radically change your investment strategy? I don’t think so
Ben Gold, XPS Pensions
Gilt yields could go either way
Investors began shifting their focus away from the UK long before the country's decision to leave the EU. Since 2007, the average UK pension scheme’s allocation to overseas equities has exceeded their UK exposure, according to UBS.
In the first quarter of 2016, the average allocation to overseas stocks stood at 29 per cent, compared to a 16 per cent allocation to UK equities.
James Trask, investment partner at consultancy LCP, highlighted the current level of uncertainty presently surrounding the UK’s negotiations with the EU, but outlined a handful of potential positives for schemes following Brexit.
A weak sterling, which has struggled since Brexit, “can be good for the value of overseas investments”, Trask said.
Brexit could also be good for scheme funding levels, depending on its consequences for the bond market, he observed.
“A bad Brexit might lead to higher gilt yields,” he said, envisaging a “worst-case scenario” that could witness foreign investors pulling out of the UK gilt market, sending yields upwards.
David Clare, partner at consultancy Barnett Waddingham, predicted slower economic growth in the UK and Europe.
He warned of a potential drop in gilt yields brought about by a round of post-Brexit quantitative easing on the continent.
“The European banks really haven’t yet addressed their debt as an issue, in the way that the US and the UK banks have done,” he said.
“On the other hand, it could be that everything’s working out quite well from the Brexit point of view,” he observed, allowing countries to continue on “the very, very slow path to seeing the normalisation of interest rates”.
“And that therefore could cause yields to increase,” Clare added.
Keep calm and carry on
The UK is scheduled to leave the EU on March 29 2019. Trustees have had nearly two years to consider the effects of Brexit.
One year out, Brexit is still a major pensions risk
The UK’s decision to leave the EU has significant implications for the pensions industry and will continue to do so long after the UK’s formal exit, says EY's Gordon Wood.
Ben Gold, head of pension investment, Leeds at XPS Pensions, said that as Brexit looms, schemes should be mindful of its consequences on the investment decisions that they are currently making, be they positive or negative.
He encouraged ”careful and sensible decision-making” from trustees, but urged against wholesale changes over the next 10 months.
“Should the potential deadline for Brexit radically change your investment strategy? I don’t think so,” he said.
