The UK’s EU referendum has delivered a stunning rebuke to the UK establishment
27th June, 2016
The Scottish National Party has made plain its intention of an independent Scotland remaining in the EU. The fragile peace process in Northern Ireland was underpinned by the dismantling of the Irish Border – it is clear that the reintroduction of a border will be unacceptable.
British Prime Minister David Cameron, a permanently diminished figure despite his arguable achievements, has decided to stand down and it has become plain that the Brexiters have no clear leader and no plan for the painstaking disentanglement from the EU. Some of the “promises” of the Leave campaign have been revealed as lies and there are serious calls for a second Referendum.
The Labour Party leadership is in crisis and the Conservatives will probably take years to recover from the internal divisions that Cameron, rather unbelievably with hindsight, sought to settle with the Referendum.
What however is plain is that an enormous number of us (tending to be older than average, less well off than average and English, rather than from the Celtic areas, but that is a gross generalisation) have become deeply disenchanted with the status quo – not just the EU. A coherent picture has not yet emerged about what we do want – but there has been a resounding message about what many of us don’t want – having said that, the nation is deeply divided on this issue.
These are only the local difficulties – the EU itself, already beleaguered by financial problems, the Eurozone is now facing an existential crisis with separatist factions from a number of member States emboldened by the Brexit poll.
These difficulties are not occurring against a settled global backdrop. Similar anti-establishment movements in the US (demonstrated by the candidacy of Donald Trump), the catastrophe at least partially created by the Western establishment in the Middle East and the West’s relationships with Russia and China continue to loom large.
The Brexit crisis may settle down quickly, but I would not bet on it. There are many scenarios which could result in political turmoil in the UK at least for years to come – possibly even a decade or more, and global markets reacted swiftly to the news of the Referendum result on Friday.
On the face of it on Friday most pension scheme trustees saw substantial losses in the value of their investments, particularly those denominated in Sterling and it seems likely that the coming months will be volatile as the market reaches out for a view of how the future is likely to evolve.
So how should Defined Benefit (DB) pension scheme trustees react? As my colleague Hugh Nolan has pointed out there is a need for a calm head, BUT trustees do need to examine (and examine urgently) how they should manage investment risk. Although pension scheme investments are long term, the events that are currently occurring may well be seismic for the UK, and many of the models for allocating assets have broken down, for the moment at least. Risky assets have (generally) become riskier and some safe havens look less safe, exemplified by the UK having its credit rating outlook cut to “negative” by the ratings agency Moody’s.
Unfortunately, my analysis is that there is a high risk of elevated uncertainty being a feature of the UK political landscape for some years to come, as a new model for our constitutional and political structures is hopefully found.
As a professional pension scheme trustee this week I will be sitting down with corporate sponsors and investment advisers (or more likely these days joining conference calls) and our own Chief Investment Officer considering whether the ship remains fit for choppier waters.
We will be carefully reviewing Liability Driven Investment (LDI) strategies and, in particular, collateral requirements. In liquid markets we will be considering the overall risk management, with particular attention being paid to allocations to Sterling denominated assets and the credit rating for UK gilts. We are also extremely concerned about the prospects for the Euro and at least in the short term we will be considering increasing exposure to safe haven currencies and assets.
For many DB schemes (particularly in the SME market) we will be considering with the sponsor more agile governance structures. We have seen a significant swing in the last few years towards acting as a sole corporate trustee or having delegated responsibility for investment matters as a co-trustee, and there is steady growth in the number of schemes using delegated consulting or fiduciary management arrangements. There is little doubt that more agile structures have the potential to benefit from the uncertainty we now face.
Many employer covenants have altered overnight – on Friday most of the corporates I spoke to exhibited uncertainty about whether Brexit will be good or bad for their business. Real problems however lie with the uncertainty, and how long it will last.
Whilst calmness is required it would be a foolish trustee who would carry on without a fundamental reappraisal – the landscape has changed, and it may not become apparent for years as to how it will look when the dust settles and in the meantime trustees need to be even more engaged, vigilant and cautious than they have needed to be recently.