Posts Tagged ‘Brexit’

Angela Burns

At the time of writing, on 29 March 2019 the UK will exit the European Union with or without a deal.

It is not possible to guess what will happen in the coming months and how markets will react. For Trustees with defined benefit pension schemes it’s an uncertain time.

The risks that Brexit poses are not new – they are the same risks that pension schemes face every day. Brexit just provides an increased chance of unlikely events.

So how should Trustees prepare?

In December 2015 the Pensions Regulator introduced guidance for Integrated Risk Management confirming that Trustees should consider risk at a holistic level. The three main areas of risk are ‘Funding’, ‘Covenant’ and ‘Investment’. Trustees should consider the main risks faced by the scheme across all three areas and more importantly how they interact. Trustees should also have in place contingency plans setting out actions that will be undertaken to limit the impact of risks should they materialise.

Brexit is effectively a ‘test’ of how well Trustees have implemented the Pensions Regulator’s proposals. A Trustee board with a robust IRM framework will be well placed to deal proactively with risks as they emerge.

It is important during times of volatility that Trustees have access to timely and accurate information to make quick, informed decisions. Trustees should ensure that their advisors are well placed to provide regular information in the lead up to, and after the 29 March 2019. Any delays in information provision will add to risk exposure.

Trustees should also have access to scenario analysis tools to determine the impact of certain events – for example a 1% p.a. fall in gilt yields. This will allow the Trustees to specify more robust and accurate actions when considering contingency plans.

Trustees with valuation dates on or around 29 March 2019 should consider the potential impact of this and may decide that the valuation date should be moved. In my view, there is sufficient flexibility in the funding regime to take a long term view on funding, and taking a snap shot of the funding position at a single point in time should not drive funding decisions.

In times of volatility, Trustees should monitor transfer value requests and any other member events where actuarial factors are used. If, for example, extremely low gilt yields result in high transfer values, the Trustees may choose to delay the provision of transfer values to see if the low gilt yield environment persists.

Trustees should also consider any employer exercises offering member options and when these options may be exercised.

Trustees may wish to disinvest funds in advance to allow for any ‘known’ payments on or around March to avoid disinvesting in inopportune conditions.

From an actuarial perspective planning is key, and a good IRM framework should result in quicker decision making.

Mike Crowe

I am sure that with the many aspects of Brexit that are occupying the minds of businesses around the country the impact on the company pension scheme might not be high up on the list for the sponsoring employer. Whilst I have every sympathy for this view it would be remiss of me not to suggest that companies don’t lose sight of this and to engage with their trustees for whom this is a very real issue.

Let me start with a question. If you asked your trustees what was the top risk on their scheme risk register what would they say? If it is not “Brexit” then ask them again until they get the right answer. (Yes, I gave you a hint there.) The current economic uncertainty caused by Brexit highlights the need for an effective integrated risk management framework for pension schemes. It is important that your trustees understand the risks that the scheme faces and that they are actively engaging with you. Effective contingency planning is key and that planning is needed now.

But, as the events of November 2018 have shown, no one knows what 29 March 2019 will bring or indeed who will be leading the discussions, so how can I plan? Will there be a deal? If there is a deal what will it look like – a hard Brexit, a soft Brexit or something in between? Maybe no Brexit at all? Will the date or the transition period be extended? All valid points, but, as I was always told, you hope for the best but prepare for the worst. So with that in mind what do you need to discuss with the trustees?

Employer Covenant

The impact that Brexit will have on the business of a sponsoring employer is critically important to the trustees. Conversations should be taking place so that trustees and their covenant advisers can understand the impact on the sponsoring employers business prospects given the uncertain economic climate and potential shifts in currency or other markets  which may impact on their support for schemes – either in terms of DB funding or contributions to DC pots. This is something that you will be very aware of for your business and open and honest dialogue with your trustees will allow them to effectively assess risk and plan.

Actuarial Assumptions

The impact of Brexit should be taken into account in setting assumptions for actuarial valuations and agreeing recovery plans. To enable the trustees to assess the impact on planned contributions to the scheme, they need to understand the impact of Brexit negotiation outcomes on the cashflows of the business.

The funding levels of DB schemes need to be reviewed as continuing low interest rates and quantitative easing means DB liabilities remain high. New market conditions will raise questions about whether the scheme’s valuation is still current. The funding level and the associated risk it poses to the employer needs to be considered and ways of mitigating this risk need to be discussed.

Buy out prices for DB schemes may be more attractive and trustees may be checking with the scheme’s advisers whether now is the time to remove some risk from the scheme.

For a sponsoring employer this is all relevant and relevant now. Being an active part of the process is crucial not just for the scheme but for your business too.

Investments

Trustees will need to consider whether the scheme’s investment strategy is still appropriate for current market conditions and take advice from their investment advisers. For a DC scheme, they will need to check to see if the default fund is suitably diversified so as to protect members from any shock to the UK or European economy. A check should be carried out to see whether there has been an impact on the value of collateral that the scheme posts or receives under derivative contracts. The scheme might need to post extra margin, or ask their counterparties to do so.

It will be some time before there is clarity on how Brexit affects schemes’ investments, contingent assets and investment yields in other countries – both EU and non EU. Trustees need to keep this under review.

Trustees will also need to check that their fund managers have a Brexit plan. They should.

Scheme members may well be worried about security of their pensions in the run up to 29 March 2019 and beyond.  It is imperative that you and the trustees prepare for whatever 29 March 2019 brings. As far as you can, protect the scheme and the members from the impact of Brexit. Communication will be key both with your trustees and your employees to manage the uncertainty that Brexit

Alan Collins

2016 – A year in review

Wow – what a year 2016 has been.  Brexit, President Trump, Hibs winning the Scottish Cup – who saw that coming?  Seriously, Hibs won the Scottish Cup.

What have we learned?  The dictionary definition of “pollster” might have to change to “people who predict things and always get it wrong”, said the actuary throwing stones from his glass-house.  My lesson to the pollsters is to quote a much bigger margin of error and include lots of caveats.

At least when it comes to 2017, it is now a reasonable stance to say that I’ve got no idea what’s going to happen. Read more »

Andrew Kerrin

One thing you can be sure of is that there is no shortage of pension updates hitting your inbox on an almost daily basis – updates we don’t always get round to reading.  Here at Spence we like to be helpful so to save you time, the team have scoured the news and developments which have impacted the pensions world in the last quarter and produced an update of the most topical, newsworthy and essential matters that you need to see to keep you updated and informed.

This quarters highlights include

  • 5 investment questions to ask post Brexit.
  • We are still  in Europe so how does this affect risk assessment frameworks?
  • Gilt yields have been detrimentally effected by Brexit but what does this mean for transfer values and funding?
  • We explain HMRC’s latest announcement on VAT and pension schemes.
  • What’s been happening with the Pensions Ombudsman and in the Court?
  • Governance has been tightened up for DC Schemes.  We explain how.

Read more »

Rachel Graham

The result of the EU referendum on 23 June 2016 was a surprise for many of us. It was difficult to predict the detrimental impact on gilt yields which occurred in the weeks following the result! With many UK pension schemes invested in gilts, the historically low gilt yields which resulted has led to pension schemes being faced with significantly higher liabilities. Transfer values for deferred members of DB schemes have also increased. A transfer value is a best estimate of the cost of providing the benefits to the member in the scheme and these too are calculated with reference to gilt yields.

Trustees may be concerned if their scheme experiences an increase in transfer value requests post Brexit. Trustees are ultimately responsible for the security of benefits of ALL members- those who wish to transfer and those who remain in the scheme. Read more »

Matthew Leathem

The past few weeks have seen many interesting changes in investment markets as they attempt to find a new level following Brexit. Pension Schemes should take this into account when reviewing their funding and investment strategies. In some cases it may be worthwhile to expedite your investment review, although as pointed out by my colleagues, this will only be in exceptional circumstances as pension scheme investments will be based over a very long horizon.

We will look at some of the major changes that have happened to markets since the EU referendum, consider how these will impact Defined Benefit (“DB”) schemes and provide ideas to help manage risks caused by the resulting market volatility over the coming months. Read more »

Neil Buchanan

The UK has made its choice, and has voted to leave the EU. What does that mean today for occupational pension schemes? In the wake of the result on 23 June 2016, significant market volatility ensued. With the yields on UK Government bonds falling, the majority of schemes will have experienced an increase in liabilities. However, the impact on funding will depend on a scheme’s investment strategy.

We therefore posed some of the questions which you may want answered to our own Chief Investment Officer, Simon Cohen. Read more »

Emer Cox

Cabinet reshuffles. Turmoil in the financial markets. The pound tumbling against the dollar. Not to mention, real concerns about Britain’s Eurovision future!  We have witnessed a lot since the EU referendum.

Trustees have already felt the impact of Brexit, with their defined benefit pension scheme deficits climbing as gilt yields have fallen to record lows. In truth, it isn’t surprising that the financial markets experienced significant turmoil in the face of such economic uncertainty.  As a result, the value of Sterling in relation to other currencies has plummeted to its lowest point in over two decades, having fallen 12% against the dollar. Read more »

Neil Buchanan

Our latest report details market movements over the 3 month period to 30 June 2016, and how this impacts the key financial assumptions required for determining pension liabilities under FRS102 or IAS19.

Major asset classes have had a relatively strong performance over the 3 month period to 30 June 2016. This strong performance follows on from the similar growth experienced in the Q1 of 2016. However, these asset classes have had their value distorted somewhat by ‘Brexit’ in the final week of the quarter. Furthermore, it is likely that any investment gains will be more than offset by increases in schemes’ liabilities (as a result of lower bond yields due to investors’ “flight to quality”), resulting in lower funding levels. To help draw attention to the practical implications, the effect of these market conditions have been illustrated on a typical pension scheme.

Finally, we also review the recent Brexit vote and how this will likely impact upcoming FRS 102 or IAS19 valuations.

Download your report now
Hugh Nolan

Brexit – now what?

So the country has spoken in a momentous and slightly surprising result!  We now enter a period of extreme uncertainty while we wait to see what happens next.  Markets don’t like uncertainty and we’ve already seen sterling fall to levels last seen 30 years ago but there is no need to panic. Our legal framework today remains exactly the same as it was yesterday and we have some time to decide what changes we’ll make and watch how negotiations go.

As far as pension schemes go, we can take comfort from the fact that funding is a long term proposition and we can afford to avoid any knee-jerk reactions.  There may also be some opportunities for funding levels to increase, especially if we see a rise in gilt yields (which may be needed to attract international money into the UK coffers).  Trustees can potentially take advantage of the expected volatility in markets to reach their investment objectives.  Setting clear targets in advance and monitoring market movements will allow schemes to trigger investment switches whenever market conditions are favourable, locking in improvements as they happen without needing extensive discussions that lead to missed chances. Read more »

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