The UK pension deficit could increase by £219bn in a no-deal Brexit scenario, a specialist risk management company has warned.
According to analysis by specialist risk manager Cardano the aggregate buy-out deficit of UK pension funds could increase by 37 per cent from current levels.
Cardano's risk model indicates that a hard Brexit could trigger a 14 per cent increase in aggregate UK pension liabilities, driven by the impact of falling Gilt yields, failing interest rates, weakened sterling and a corresponding rise in inflation on schemes' long-term pension obligations.
According to Kerrin Rosenberg, UK chief executive officer at Cardano, a hard Brexit scenario could drive a 6 per cent increase in UK pension scheme assets on the back of currency tailwinds as the potential fall in sterling would be positive for the international constituents of the FTSE 100 and indeed for schemes' allocation to global equity and debt.
Yet this potential improvement would be outweighed by the 14 per cent increase in liabilities, thereby widening the UK's aggregate funding gap, he added.
Mr Rosenberg said: "Brexit presents a very different challenge to UK pension funds, financial markets and the national economy.
"Since the European Union referendum we have had this political event dominate the markets' mood and attention – yet the quantum and characteristics of the potential market and economic impacts remain relatively unknown.
"This is a tail risk with a difference because the date of the UK’s exit is known. The runway into March 29 should allow UK schemes and their advisers to prepare for the worst – even if the eventual outcome ultimately surprises on the upside.
"In our day to day analysis of the risks facing UK pension schemes, we model and map out the potential challenges across a broad spectrum of horizons.
"As our analysis indicates, the risks to schemes’ funding positions should not be underestimated and we would encourage UK schemes to think critically about the scale and scope of risks that Brexit may present and to act now – before it is too late.
"As we enter into 2019, Brexit will be just one of a range of risk factors that schemes should be proactively addressing in their portfolio positioning.
"We have reached inflection points across a number of fronts: the potential impact of monetary tightening, the global growth trajectory and rising protectionism should be front of mind for trustee and their advisers going into the New Year."
Conversely, Mr Rosenberg added that a soft Brexit scenario could cause the UK's aggregate buy-out deficit to fall by £138bn.
This would be a 24 per cent reduction from current levels, driven principally by an 9 per cent fall in liabilities, easing the funding challenge for scheme trustees and corporate sponsors across the UK.
Commenting on the impact of Brexit, Darius McDermott, managing director of London-based Chelsea Financial Services, said: "Post the referendum sterling was down a lot, but as you know what this led to was a rally in the FTSE 100 due to the fact that the index is 70 per cent overseas and their company earnings will go up if sterling goes down. So after the referendum you may see the FTSE go up even with the outlook so bleak."
aamina.zafar@ft.com
