The UK's decision to leave the EU has, and will continue to have, implications for pensions – for both defined benefit (DB) and defined contribution (DC) schemes.
Financial markets have suffered, significantly increasing deficits in many defined benefit schemes and lowering the projected outcomes for defined contribution savers. As well as the impact on longer-term funding plans (and potentially short-term budgets), the immediate result on accounting deficits of DB schemes could be detrimental to balance sheets, impacting distributable reserves.
Employers with DB schemes will need to work closely with trustee boards to assess the current strategy to deliver a fully funded scheme. Trustee investment committees will need to consider their tactical approach to managing this period and what it means for longer-term plans. The impact of Brexit on the sponsor covenant to defined benefit schemes will also need to be considered and understood. It may even be appropriate to take a more fundamental look at the historic funding strategy: are the standing actuarial methodologies used to set assumptions still fit for purpose under new market conditions? How much of the new deficit is real and how is purely an artefact of actuarial models?
For DC schemes, it’s the members who are directly impacted by the outcome of the leave vote. Employers should carefully consider what communications and support to provide members, particularly those looking to retire in the next few months.
As the impact of Brexit unfolds, we believe the focus for pension scheme sponsors and trustees should be on good governance and vigilance. It’ll also be important to keep a long-term integrated view, consistent with the nature of most pension commitments.