UK defined benefit funds would see their deficit increase billions of pounds if the UK leaves the European Union without an agreement, according to analysis from Colombia Threadneedle.
If, on the other hand, the government agreed to a softer Brexit, schemes could be in line for a £85bn surplus.
This is because while UK DB funds’ assets would rise in a no-deal scenario, liabilities would increase even further.
In a statement published today (March 11), Toby Nangle, head of global asset allocation at Colombia Threadneedle, modelled different Brexit scenarios and their impact on the finances of UK schemes.
He said DB schemes in the UK had equity assets which are overwhelmingly non-domestic and as such currency weakness had boosted returns when measured in sterling.
The asset manager estimated the Brexit vote had boosted asset values by about £125bn, while liabilities increased by about £160bn – which resulted in a deficit of £35bn.
According to the latest figures available from the Pension Protection Fund PPF 7800 Index – which gives the estimated funding position of 5,450 DB schemes eligible for PPF protection - these pension funds had a £23.1bn deficit at the end of January.
One of the scenarios modelled by Mr Nangle sees Britain leave the EU with no transition arrangements. In this scenario he expected the Bank of England to step in and cut rates and reinitiate quantitative easing.
Another scenario was a softer Brexit leading to a closer and more integrated relationship with Europe than is envisaged under the current government programme.
The research indicated the more disruptive the Brexit, the better the short-term performance of the scheme's assets.
Mr Nangle said: "Just like the referendum-induced asset strength that we have seen so far, this is because of the degree to which UK schemes invest in fixed income assets whose value is boosted by lower yields attached to growth pessimism, and assets based outside of the UK whose value rises in sterling terms when sterling weakens."
In a no-deal Brexit, the value of DB pension assets is expected to be boosted by about £90bn, while a softer Brexit could wipe the same amount off the total.
And while the end value of liabilities isn’t directly impacted by financial market movement, the present value of liabilities was extremely sensitive to the firm's Brexit scenarios, he noted.
In the event of a no-deal the asset manager anticipates the present value of liabilities to rise by more than £140bn, while a softer Brexit would take about £180bn from the total.
Mr Nangle concluded: "It appears that the knock-on from our financial market scenarios are that a no-deal Brexit would push the system into a circa £55bn deficit, while a softer Brexit would push the system into a circa £85bn surplus.
"And so from a pensions perspective the short-term impact of the next steps for Brexit look to be a question worth about £140bn."
maria.espadinha@ft.com
