DB & THE BREXIT IMPACT
(BR)EXCITING TIMES
FOR DEFINED BENEFIT
PENSIONS?!
PAGE 2
On 23 June 2016 British voters voted to leave the EU. In the weeks since we have seen
significant market volatility, a downgrade to the UK’s credit rating, a change in Prime
Minister and ongoing political upheaval.
The Bank of England’s decision on 4 August to cut
interest rates for the first time since 2009, together
with £70 billion of additional Quantitative Easing,
added to Sterling’s volatility and another fall in gilt
yields contributed to further pressure on defined
benefit scheme funding.
Trustees need to understand the impact on their
schemes by identifying the key risks and agreeing
potential ways to mitigate them. The Brexit Scenario,
and the corresponding increase in risks, is exactly the
type of scenario that the Integrated Risk Management
framework, introduced by The Pensions Regulator,
seeks to consider.
This note highlights the key issues for trustees and
employers to consider within their IRM Framework.
1. EMPLOYER COVENANT
2. INVESTMENT
Brexit will impact on the UK economy – potentially
damaging an employer’s ability to support the
Scheme.
The weeks following the referendum saw increased
volatility across markets. Trustees and sponsors
should:
Trustees should consider the impact on employer
profitability, cash-flow generation, recovery-plan
affordability, and the risk of insolvency. In particular
they should consider:
• Consider which assets are most affected by
volatility and exchange rate changes
• The impact of a rise in dollar-based costs (e.g. fuel)
and interest rate changes
• Whether any key customers are affected? Is the
employer at risk of losing business in the EU post
Brexit?
• How is group strategy affected? Might the
employer consider relocating its operations?
• Is there an opportunity to increase funding to take
advantage of a weaker Sterling?
• Consider their ability to deal with further shocks
(falls in gilt yields, rising inflation, etc) and
understand the options for reducing and managing
risk
• Review de-risking plans and ensure funding and
market triggers remain relevant
• Consider the outlook for UK property and the
illiquidity of some property funds
• Consider expected disinvestments and the impact
of volatile markets, potential illiquidity and higher
trading costs.
WEAKER STERLING
1.5
GBP to USD
GBP to Euro
1.4
1.3
1.2
1.1
01 June 2016
Source: fx.sauder.ubc.ca, August 2016
01 July 2016
01 August 2016
PAGE 3
APPLYING THE IRM FRAMEWORK
Broadstone has taken
the key elements of the
guidance and incorporated
it into the following
framework. There are then
five main steps in applying
the framework.
INITIAL
CONSIDERATIONS
RISK
IDENTIFICATION
AND ASSESSMENT
COVENANT
ONGOING RISK
MONITORING
OVERALL
RISK
PROFILE
INVESTMENT
DOCUMENT THE
IRM PROCESS
AND DECISIONS
REACHED
FUNDING
RISK
MANAGEMENT
AND SCENARIO
PLANNING
3. SCHEME FUNDING
4. CONCLUSION
In response to lower than expected growth the
decision to cut interest rates has already impacted
on the 20 year gilt yield. On 9 August, 20 year gilts
yielded just 1.32% p.a. Put simply, this is bad news for
DB schemes and trustees and employers should:
Brexit will impact the real economy, financial markets,
DB scheme valuations and the level of support DB
employers are able to provide.
• Prepare for increased deficits and difficult funding
negotiations - especially if their valuation date is
approaching
• Understand the impact that larger pension deficits
and (possible) changes in Experian ratings might
have on PPF levies
• Consider reviewing the calculation bases for
transfer values, trivial commutation factors and
other actuarial assumptions
• Employers should consider their options for
reducing and managing DB scheme liabilities.
It is likely that all the main DB risk areas (covenant,
investment and scheme funding) will be affected.
Broadstone does not think a knee jerk reaction
is necessary, but recommends that trustees and
employers set up a framework for a considered
response to the challenges emanating from Brexit.
Broadstone believes the IRM framework can be
an important tool in providing practical help and
encouraging closer collaboration between trustee
and employer and encourages its adoption as a key
instrument in improved understanding of risk and how
it can be mitigated.
FALLING GILT YIELDS
4%
3%
2%
1%
0%
2013
2014
Source: FT-SE Actuaries 20 Year Gilt Yield Index - 2013-2016
2015
2016
If you wish to discuss any of the topics raised in this publication further, please
contact your existing consultant, or alternatively contact one of the individuals below.
CONTACT US TODAY
Oscar Brown
Actuarial Director
Peter Dean
Investment Consulting Director
+44 (0)20 3869 6858
oscar.brown@broadstone.co.uk
+44 (0)20 3869 6853
peter.dean@broadstone.co.uk
For more information on our
wider pension and employee
benefit services contact:
www.broadstone.co.uk
corporate@broadstone.co.uk
55 Baker Street
London
W1U 8EW
United Kingdom
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Whilst care has been taken in preparing this publication it is for information only. It is not, and should not be construed, as advice and
accordingly no reliance should be placed on the information contained herein. Any views or opinions expressed herein are not necessarily the
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