The Big Picture
DB funding stable ahead of Brexit FTSE 100 Companies 0 -13 -20 -40 -60 -80 -100 -120 -82 -24 -20 -32 FTSE 350 Companies
All UK Private Sector Pension Schemes
-107
At 28 February 2019 Billion £
At 28 February 2018 Source: JLT Employee Benefits
A no-deal Brexit could widen the deficit in defined benefit (DB) pension schemes, JLT Employee Benefits believes. The funding
position of private sector DB
schemes has remained steady, despite the ongo- ing uncertainty surrounding the terms of the UK’s departure from the European Union. Indeed, at the end of February, the funding level at private sector final salary schemes remained largely flat at 95%, up from 93% in 12 months. This meant that the deficit fell to £82bn from £107bn, according to JLT’s calculations, based on the IAS19 standard accounting measure. Blue chip schemes are in a much stronger posi- tion at 98% funded, up from 97% a year earlier, giving them a combined £13bn deficit. Schemes for workers at FTSE 350 companies were 97% funded, slightly higher than the 96% recorded at the end of February 2018. So they share a £20bn deficit. However, this could change, said Charles Cowl- ing, JLT’s chief actuary. “Whatever the outcome of Brexit, the outlook for pension scheme deficits suggests a high risk of more volatility and poten- tially higher pension deficits.”
The impact on pension scheme’s liabilities could be worse if there is a no-deal Brexit. A vote to rule out such an option in March was not legally binding. Indeed, the Bank of England argues that such an outcome would likely push inflation higher thanks to a weaker pound and increased tariffs for selling goods to other countries. The Bank could respond by lowering interest rates, which have been anchored below 1% since the financial crisis. This would not be welcomed by trustees as it could expand the funding gap in their schemes. Pension schemes have been de-risking by reduc- ing their equity exposure in favour of assets that offer protection from volatility, such as property, yet they may still be exposed to a fall in interest rates, a rise in inflation or both, Cowling warns. “Trustees and companies should urgently look at their hedging strategies on interest rates and inflation and check whether increases to the level of protection are now appropriate,” he added. “Trustees would not gamble pension scheme money on black or red in a game of roulette – I’m not sure that gambling on the next direction for interest rates is any better.”
12 | portfolio institutional | March 2019 | issue 82
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