Focusing energy on the most relevant fallout from Brexit

We have all seen a staggering amount published since the leave vote last Thursday explaining the far-reaching implications for pensions, some projecting outcomes across future generations. 1 in 3 of my emails received on Friday were about Brexit – all a very interesting read but they left me questioning whether DB scheme trustees and Sponsors would be able to navigate through the detail to understand what they needed to consider first and, importantly, what decisions they needed to make.

“I urge a focus on discussions that will lead to needed decisions to manage risks we know about, and a deferral of less relevant discussions.” Mark van den Berghen, Senior Consulting Actuary

With a particular interest in DB scheme risk management, I believe it is imperative that DB scheme stakeholders address the most relevant implications as quickly as possible. I provide three here:

  1. Covenant. The impact on the Sponsor covenant afforded to DB schemes is the most overlooked element in a number of the articles I have read. Each scheme must consider how the different shades of Brexit/Brexit lite will impact its Sponsor. Only then can schemes determine how their investment and funding strategy may need to change. Obtaining an update on the business outlook and specific impact on financials is a must for most.
  2. DB pensions accounting. On a related point, many Sponsors will be considering budgets for 2017 now and the 25 basis point reduction in long-term corporate bond yields will be detrimental to the projected balance sheet and P&L. There will also be Sponsors who account using a measurement date of 30 June 2016. For these, discussions on acceptable assumption ranges with auditors will need to be carefully negotiated.
  3. Cashflows. Depressed equities mean disinvestment is relatively unattractive in the short term, particularly from Sterling-denominated funds. Investment advice should be sought. This is especially important where large benefit outflows are expected over the short to medium term – for example, where schemes are carrying out liability management exercises involving member transfer values. Cashflow management should be at the top of any action list.

I urge a focus on discussions that will lead to needed decisions to manage risks we know about and a deferral of less relevant discussions, such as whether GMP equalisation will be required in future.


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