Pension schemes: 6 weeks post referendum
Whilst we still remain in the EU, the uncertainty around the vote to leave continues, Over the past few weeks events have been moving at a whirlwind pace.
Former Pensions Minister Ros Altmann’s resignation, following just 14 months in the job, has not come as a surprise to many.
While stressing the continuation of auto-enrolment and a need to reform pensions tax relief, Altmann departed from her role noting that the country has moved into “unchartered waters”.
While the political scene in the UK is now becoming clearer, the terms on which the UK will exit the EU are still far from certain and this is creating uncertainty in the market and creating financial ramifications for pension funds. Only last week Scottish widows customers received a letter to say that they are not in a position to deal in the Scottish Widows Henderson UK Property life or pension funds.
This was following an announcement from Hendersons that uncertainty generated by the European Union referendum has had a negative effect on market sentiment and led to substantial withdrawals from property funds!
Last week the bank of England rolled out its austerity package, cutting interest rates from 0.5% to 0.25%, a record low and a first cut since 2009. It is reported that The Bank of England deputy governor, Ben Broadbent, said there could be a further interest rate cut this year if needed.
What does this mean for DB schemes?
This will certainly keep gilt yields lower for longer and ultimately increase deficits. Its going to be a demanding few years for Trustees, as they consider how to repair these deficits in a low interest rate world.
As well as assessing the impact of the current market conditions on the plan’s funding position, trustees should also assess the potential impact of Brexit on the strength of the Employer covenant.
However these are long term investment vehicles and Trustees should keep this in focus, the popular advice of ‘keep calm and carry on’ remains. Trustees should continue to plan for the long term. A rate cut now may not have a huge impact on investment values reported in 30 years time, by then we would have been through many market cycles. For closed schemes with a shorter time scale de risking is key.
For more information please contact a member of the Pensions team.