Commenting, Andy Green, CIO at Hymans Robertson, said: “Whether you agreed with the decision of the UK electorate or not, it is hard to underestimate how momentous this is. The ramifications are likely to be felt not just in the UK, but in Europe and indeed the rest of the world.
“For now, what is certain is that the UK’s decision to leave the European Union has led to a huge amount of political and economic uncertainty. But risk never comes alone. It is always accompanied by opportunity. It is important that plans include scenarios in which those opportunities are grasped.
“Clearly there is an immediate impact on markets and the funding positions of DB pension schemes; but the full, longer-term impact remains to be seen.”
Discussing what’s happened in markets, he said:
“Financial markets have responded even more dramatically to the result than expected. They are moving sharply, with the FTSE 100 slumping 8.7% on opening. We’ve seen the pound hit a 30 year low against the dollar with a record intra-day swing.
“As is often the case in times of extreme uncertainty and volatility we expect to see a “flight to safety”. Barometers of risk aversion have gone up in value, with corresponding falls in yields – around 25bps on nominals.
“We’d expect continued volatility over the coming days as investors decide what the result means for the outlook for different investments. The threat of another Scottish referendum will also add to uncertainty and volatility, and there is the potential for a wider domino effect if similar EU Referendum votes are held in countries across Europe, which would place pressure on the make-up of the Euro.”
Commenting on what those running DB schemes should do, Jon Hatchett, Head of Corporate Consulting, said: “We always caution against knee jerk reactions to short term market volatility. Those running DB schemes need to remember that pensions are a long-term game.
“Pension funds have been limited in their ability to protect themselves fully from the uncertain outcome of the EU Referendum. Following the vote to Leave, it’s likely that falls in expectations for UK GDP growth will weigh on equity markets and on interest rates – putting more pressure on funding deficits.
“While we’d advise schemes to avoid over-reacting to short term market volatility, as the dust settles, it may be worth considering whether any changes to investment strategy are required. Particular care should be sought if any triggers have been breached and we recommend seeking clear advice before taking any action.
Discussing what it means for sponsor covenant, Hatchett added: “While the short term economic effects will be predominantly negative, the pain will not be shouldered equally. Companies will be waking up to a new dawn today, and contingency plans will be kicking into place. Trustees will rightly want to understand what these plans look like, and reassess their scheme funding strategies accordingly.”
Emphasising the need for DB schemes to become more resilient to risk, he said: “What events of recent weeks do highlight is the need for schemes to become more resilient to risk. Specifically, they need to ensure they don’t take more risk than they need to.
“The risks associated with holding too much in volatile risk based assets are more acute for schemes which are more mature. Without a clear disinvestment plan, schemes can find themselves forced to sell assets at inopportune times.
This exacerbates underlying market volatility.”
Discussing the legislative impact he concluded: “Much of our pensions and insurance legislation and regulation has been produced by the European project – the recently implemented Solvency II is just one example. While it is hard to see any rollback of antidiscrimination legislation, depending on the future trade compact agreed with the remainder of the EU, the UK has more freedom to set its own policy. What this means is impossible to say at the moment, but we will all need to keep a watching brief in the months ahead.”
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