Brexit vote gives defined benefit pensions yet another battering, as markets swing wildly after Leave decision is revealed

Hayley Kirton
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Has Brexit driven final salary pensions to the end of the road? (Source: Getty)

The vote for Brexit may have driven another nail into the coffin of defined benefit (DB) pension schemes, after the markets went into meltdown on Friday.

Figures from Hargreaves Lansdown show that around 33 per cent of UK scheme investments consist of shares, 25 per cent of which are UK shares, which will have come as little comfort to those who watched the FTSE 100 lose more than £100bn in value on Friday morning.

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Meanwhile, Stewart Hastie, pensions partner at KPMG, added:

The UK's 6,000 private sector DB schemes covering £1.6 trillion of pensions obligations will be in for a rough ride hit with the prospect of higher inflation, and an expected fall off in pension asset values over the next couple of years. Long end government bond yields will likely stay stubbornly low keeping pension liability values high and meaning pension deficits are likely to increase and be more volatile.

Ashurst pensions partner Marcus Fink warned that Friday's result means that employers with DB pensions "have the headache of poor returns on equities, depleted fund values and higher contribution demands from pension scheme trustees."

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Fink continued: "Also, spare a thought for the trustees planning long-term investment strategy amidst widespread economic uncertainty."

Experts have also warned that the referendum has produced a double-blow for DB pensions, as many had been struggling with uncertainty in the markets in the run up to last Thursday's vote.

"Employers with DB schemes will need to work closely with trustee boards to assess the current strategy to deliver a fully funded scheme," said Richard Cousins, a pensions partner at PwC. "Trustee investment committees will need to meet frequently over the coming months to manage this period as robustly as possible."

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Figures from PwC's Skyval Index, which tracks the funding level of DB pensions, found that the collective deficit had increased by almost £100bn since March, and by nearly £50bn in the last month alone.

Meanwhile, figures from Hymans Robertson show that the total DB pension deficit had worsened by £80bn by midday on Friday.

"While we’d advise schemes to avoid over-reacting to short term market volatility, as the dust settles, it may be worth considering whether any changes to investment strategy are required," said Jon Hatchett, head of corporate consulting at Hymans Robertson. "Particular care should be sought if any triggers have been breached and we recommend seeking clear advice before taking any action."

However, even though the sudden swings in the market combined with sterling's steep drop against the dollar on Friday likely cast fear into the hearts of many pension trustees, Bob Scott, partner at Lane Clark & Peacock, pointed out that there could be some winners in this situation.

"While this uncertainty is unlikely to be good news for pension schemes it is worth noting that those schemes with significant unhedged overseas investments could actually see their asset values increase – at least in sterling terms," Scott said.

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