Cover story
Paradoxically, despite the macroeconomic adversities that the UK has been facing since the vote to leave the EU, pension schemes have improved their funding lev- els. Fuelled by quantitative easing and buoyant equity markets, DB schemes in particular have seen a solid rise in assets over the past 10 years, which has offset the increase in liabilities. As of 2018, UK DB schemes had a £117.1bn surplus, a relatively comfortable position compared to the £41.1bn surplus they had four years ago, according to the Pension Protection Fund. Moreover, because most equity assets are non-domestic, schemes have benefited from the falling pound, while the lower gilt yields that have resulted from market pessi- mism have driven the price of UK govern- ment debt higher, offering an additional boost to DB scheme portfolios. Consequently, The Pensions Regulator (TPR) appears to be approaching the Brexit risk with a typically British “Keep calm and carry on” attitude. “We have used our new supervision approach to explore with some of the most significant schemes what they are doing to prepare for Brexit. They have reported that they are generally confident they will weather any short-term volatility, if it comes, because of their long- term investment strategies and risk management approaches. Schemes also report that, where appropriate, they have been talk- ing to employers about covenant risk, a TPR spokesperson said. But a lot will depend on what kind of Brexit the country is fac- ing. Leaving without a deal might provide another, albeit temporary, boost to pension assets, yet the beneficial effects would be annulled by a sharp spike in liabilities, predicts Toby Nangle, head of global asset allocation at Columbia Threadneedle, an asset manager. He also forecasts that further rate cuts and the devaluation of sterling could provide a £90bn boost to DB pension assets. At the same time, the present value of liabilities could rise by more than £140bn, resulting in an overall deficit of £55bn. This could be averted if a last minute withdrawal agree-
ment is decided, predicts Nangle, who argues that a softer Brexit could leave schemes with a surplus of £85bn. “From a pensions perspective, the short-term impact of the next steps for Brexit look to be a question worth around £140bn,” he adds.
PROJECT COPY AND PASTE Deal or no deal, leaving the EU means that European regulations and directives will no longer be implemented into UK law, offer- ing parliament more autonomy to decide on legislation. Does this mean that the cur- rent pensions legislation will be completely revised? Paul Phillips and Ferdy Lovett, partners at law firm Sackers, argue that Brexit is unlikely to result in any dramatic legislative changes.
One key concern has always been that Brexit could affect the Ucits passporting rules, which allow EU domiciled asset man- agers to market their products and services in the UK and vice versa. So how will pen- sion schemes deal with reduced access to investment management services? Colum- bia Threadneedle and M&G have moved billions of pounds worth of assets to Lux- embourg and Ireland, yet the actual fund
The laws governing the operational man- agement of UK pensions will also not change in the short term, most of whom were UK specific anyway since pensions law is largely decided on a national level, Lovett says. “They initially wanted to call the withdrawal treaty ‘The Great Repeal Bill’ but then changed its name to the ‘Withdrawal Act’,” he adds. With more than 52,000 pieces of legislation needing to be changed as a result of leaving the EU, any laws currently being in place have been moved onto UK statues to avoid black holes in legislation, Lovett says. “So it is really more of a project copy and paste,” he adds. Nevertheless, Parliament does now have the option to revise pension’s rules in the longer term, but this is likely to be a lengthy process he predicts. “It really depends on what kind of Brexit we will see but we think any changes for pension schemes will be market driven rather than legislation driven. From an operational perspective, the main challenge for schemes would be that at any given time there will be a num- ber of schemes looking to conduct major transactions or move member money into other locations, especially schemes looking
Unless there is a significant sea change in the
UK government’s willingness to negotiate, I don’t see there being a big turnaround in sterling. Mark Hedges, Nationwide Pension Fund
management still largely takes place in the UK.
Philips and Lovett are confident that by now most asset managers have taken precautions.
“Our clients are checking with many EU27 providers, most seem to have applied for temporary permissions or have already made full-blown applications to distribute their funds, so we haven’t encountered any problems to fund distribution yet,” Phillips says.
to prepare for a buy-out or having recently completed a buy-out deal,” Lovett says. While the de-risking market has so far had a strong start of the year, market volatility as a result of Brexit could be a challenge in implementing the shift in responsibility to the insurers.
“Schemes will have to be careful to prevent any major movements in October, you don’t want to be buying and selling too much at a volatile time,” the team at Sack- ers warns.
Issue 86 | September 2019 | portfolio institutional | 33
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