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Risk Management

U.K. schemes must consider all risks Brexit may pose — analysis

The trustees of U.K. pension schemes and corporate scheme sponsors must be prepared to respond to the results of Brexit, whatever they may be, according to analysis by specialist risk manager Cardano.

On a buyout basis, the aggregate deficit of U.K. pension funds could rise by as much as 37% in the event of a no-deal Brexit scenario. Based on Cardano's analysis, a hard Brexit could trigger a 14% rise in aggregate U.K. pension liabilities, driven by falling gilt yields, failing interest rates, weakened sterling and a rise in inflation on schemes' long-term pension obligations. And while a hard Brexit could possibly drive a 6% rise in U.K. pension scheme assets, this potential improvement in assets would be offset by the 14% rise in liabilities.

"Brexit presents a very different challenge to U.K. pension funds, financial markets and the national economy," Cardano U.K. CEO Kerrin Rosenberg said in a news release. "Since the EU 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."

Mr. Rosenberg added that pension scheme sponsors should not underestimate the risks that could befall their funding positions. "We would encourage U.K. schemes to think critically about the scale and scope of risks that Brexit may present and to act now — before it is too late," he warned.

While a hard Brexit could result in an increase in pension liabilities, Cardano's analysis suggests that a scenario in which a soft Brexit occurs could cause the U.K.'s aggregate deficit to fall by 24% from current levels, driven by a 9% drop in liabilities,.

With some of the major uncertainties of the U.K.'s future relationship with the European Union out of the way, a more favorable Brexit could enable growth and increase the pace of bank rate hikes.

"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," Mr. Rosenberg said. "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 trustees and their advisers going into the New Year."

With the outcome of Brexit still up in the air, trustees should consider adjusting their investment strategy based on the impact of a hard Brexit on sponsors. They should also think about using an LDI toolkit and diversifying their growth portfolios to limit the impact of different Brexit scenarios.