Hard Brexit Could Raise UK Pension Deficit by £219 Billion

Report also says a ‘soft Brexit’ could reduce pension deficits and liabilities.

A hard Brexit will likely be difficult for UK pension funds, and could cause their aggregate buy-out deficit to increase by as much as 37%, or £219 billion, and their liabilities to rise 14%, according to a report from specialist risk manager Cardano. 

“Brexit presents a very different challenge to UK pension funds, financial markets, and the national economy,” Kerrin Rosenberg, Cardano’s UK CEO, said in a release. “Since the EU Referendum we have had this political event dominate the markets’ mood and attention—yet the quantum and characteristics of the potential market and economic impacts remain relatively unknown.” 

According to Cardano’s analysis, a hard Brexit scenario would initially lead to the Bank of England easing policy and lowering growth expectations, which would likely lead to lower gilt yields and a declining pound. Conversely, the firm said a so-called soft Brexit would enable growth and could increase the pace of Bank of England rate hikes, strengthen the pound, and send gilt yields higher. This could result in a 9% drop in liabilities, and reduce the buy-out deficit by 24% or £138 billion, said the report.

“As we enter into 2019, Brexit will be just one of a range of risk factors that schemes should be proactively addressing in their portfolio positioning,” said Rosenberg. “We have reached inflection points across a number of fronts: the potential impact of monetary tightening, the global growth trajectory, and rising protectionism should be front of mind for trustee and their advisers going into the New Year.”

Cardano’s risk model indicates the 14% rise in aggregate UK pension liabilities would be spurred by the impact of falling gilt yields, a weakened sterling, and a corresponding rise in inflation on long-term pension obligations. However, it also showed that a hard Brexit scenario could lead to a 6% spike in UK pension assets due to “currency tailwinds” because the potential fall in sterling would be positive for the international constituents of the FTSE 100 and pensions’ allocation to global equity and debt. On the other hand, this potential improvement would be canceled out by a 14% rise in liabilities, thus expanding the UK’s aggregate funding gap.

“As we enter into 2019, Brexit will be just one of a range of risk factors that schemes should be proactively addressing in their portfolio positioning, said Rosenberg. “The risks to schemes’ funding positions should not be underestimated, and we would encourage UK schemes to think critically about the scale and scope of risks that Brexit may present and to act now—before it is too late.”