In this blog, our partners Lincoln Pensions highlight four things that management teams can usefully do, alongside pension trustee boards to better manage the volatility and uncertainty of Brexit.
“By failing to prepare, you are preparing to fail”, Benjamin Franklin
There is much in the press about the impact of Brexit on UK plc and the uncertainty it brings. Less frequently covered, are the implications for defined benefit pension schemes and more importantly, the effect on their sponsors who are also facing pressures unrelated to pensions risks.
Following the referendum, we saw market conditions weaken and pension deficits for most schemes grow, increasing schemes’ reliance on sponsors and creating new challenges for management teams.
As with all aspects of risk management, what sponsors and schemes will do is necessarily very ‘scheme specific’. However, whatever your view of Brexit, the volatility associated with potential outcomes means that it is certainly a ‘risk event’.
We highlight four things that management teams can usefully do, alongside pension trustee boards, to better manage the volatility and uncertainty.
1. Proportionate contingency planning
Brexit is an example of a more extreme event which needs to be addressed using integrated risk management (IRM) as it will impact covenant and investment foremost, with a consequential effect on funding. In broad terms, sponsors will be required to underwrite Brexit risk as it relates to their own business as well as their pension scheme, and management teams should therefore ensure that the possible impact of Brexit on pension funding requirements is considered within contingency planning exercises.
2. Tactical portfolio repositioning working on an integrated basis with scheme investment consultants or fiduciary managers
Understanding how a business might respond to, for example, currency or inflation movements in tandem with an understanding of how those same drivers may impact the funding position of the scheme is critical. Some of our corporate clients have used tactical repositioning of investment portfolios to deal with problematic expected correlations, ensuring that possible risks to company assets are considered alongside scheme risks.
3. Doing nothing is an active decision, although it may not feel like that
Doing nothing may be the right decision for some sponsors and schemes, as all the uncertainty and the specific risks faced by both scheme and sponsor, may mean it is difficult to justify a change at this juncture. In such cases, we advise clients to robustly debate and document their rationale for that decision.
4. Whether to sign-off a triennial valuation that bridges 31 October 2019 ahead or after that date?
Some schemes may actively consider holding fire on signing-off a valuation until beyond the revised Brexit deadline. Clearly, we may find that date is further extended by the EU / UK government. There is a case for sponsors and trustees to retain flexibility – which the Pensions Regulator might also understand notwithstanding the “clearer, quicker, tougher” mandate which created less leeway for submitting valuations beyond the deadline.
Now more than ever management teams need to work closely with pension trustee boards to come out of the Brexit challenge in the best position possible.
“It is crystal clear that UK plc is facing a challenging time and will continue to do so even after we see some sort of Brexit closure. C-suite boards of corporates that are sponsoring employers need to work closely together with pension trustees to ensure the pension provision is aligned with the sponsor’s reward strategy. Without this collaborative approach the task of delivering the pension promise to members is going to be harder.” Richard Farr, MD, Lincoln Pensions.
Contact Richard Farr to discuss how we can help you and your Board.
T: 020 3889 6300
Lincoln Pensions are hosting a webinar on the 18th June to delve into these topics further. Don't miss out, sign up here: https://intouchnetworks.com/webinars