The post-Brexit fallout for sponsors and trustees of UK defined-benefit pension schemes has continued with the decision of the Bank of England on 4 August to cut interest rates to an historic low of 0.25 per cent and to start a new quantitative easing programme. It has been estimated that the decisions resulted in defined-benefit pension scheme liabilities in the UK increasing by £70bn to £2.4tn (measured on a buyout basis).
UK defined-benefit schemes have experienced turbulent times since the Brexit referendum. While some asset prices have recovered since the ‘leave’ vote, foreign exchange risk and volatility could still have a marked impact on investment returns. On the liabilities side, despite the downgrading of the UK’s credit rating gilt yields have remained low since the vote, and this pushes up pension scheme liabilities. The prolonging of quantitative easing is likely to suppress gilt yields further, creating a cycle of high pension scheme deficits despite the intention of quantitative easing being to provide a boost to the economy. The seemingly ever-increasing cost of defined benefit pension benefits must give greater impetus to any company plans to close schemes to new members or future accrual.
It is estimated that the aggregate buyout deficit across UK defined-benefit schemes hit the £1tn mark in August. Sponsors who are currently undergoing their scheme valuation will need to work closely with pension scheme trustees to understand the possible impact of Brexit on the sponsor’s longer-term strategic goals and financial standing, in order to reach funding solutions that are appropriate in the circumstances.
“Sensitivity analysis cited by Ros Altmann, the pensions expert, shows that for every one percentage point fall in long gilt yields, there will be an increase in a pension fund’s liabilities of 20 per cent, while the value of its assets will climb by only 7-10 per cent.”