Please read me … Part 2
20th November, 2018
A very unhelpful title for this month’s article, but if I had put down that the subject was Brexit and key considerations for Trustees in the run up to 29 March 2019, I feared that eyes would have glazed over and there would be cries of not more on Brexit. Stick with me.
Let me start with a question. What is the top risk on your scheme risk register? If it is not “a no deal Brexit” then please go back and rewrite it. The current economic uncertainty caused by Brexit highlights the need for an effective integrated risk management framework for pension schemes. It is important that Trustees understand the risks that their schemes face. Effective contingency planning is key and that planning is needed now.
But no one knows what 29 March 2019 will bring, 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? All valid points, but, as I was always told, you hope for the best but prepare for the worst. The worst is a no deal Brexit scenario. So to start your planning lets look at three key areas that you can plan for.
Trustees need to understand the impact that a no deal Brexit will have on the business of its sponsoring employer. Conversations should be taking place with employers to review their 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.
The impact of a no deal Brexit should be taken into account in setting assumptions for actuarial valuations and agreeing recovery plans. To enable 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. It would be worth checking with the scheme’s advisers whether now is the time to remove some risk from the scheme.
Trustees should consider whether the investment strategy is still appropriate for current market conditions and take advice from their investment advisers. For a DC scheme, the Trustees should 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 should also check that their fund managers have a Brexit plan. They should.
It is imperative that you prepare for whatever 29 March 2019 brings. As far as you can, protect your scheme and your members from the impact of a no deal Brexit. It is a risk that with good planning you can and should manage.