Cardano: Brexit deal failure ‘could see deficits soar by a third’

[PRIBO247]

The UK’s aggregate defined benefit (DB) pension fund
shortfall could spike by as much as £219bn (€242.7bn) if the
country fails to pass a withdrawal agreement to exit the EU,
consultancy firm Cardano has warned.

The company analysed potential movements in interest rates,
government bond yields and equity markets to forecast assets
and liabilities in various Brexit scenarios.
A so-called “hard Brexit” – whereby prime minister Theresa
May was unable to get parliamentary backing for her
withdrawal agreement before 29 March – could trigger a 14%
increase in total DB scheme liabilities, Cardano said, as a
result of gilt yields and interest rates falling. Such an
outcome would also weaken sterling and push up inflation,
which would also have an impact on DB obligations.

On the assets side, the FTSE 100 index would likely rise as a
result of the weakening currency improving conditions for
internationally focused constituents. The currency movements
would also help schemes’ allocations to global equity and
debt, Cardano said.

However, the consultancy forecasted that this would only
push up assets by 6% – far less than the increase in
liabilities.

Kerrin Rosenberg, Cardano’s UK
CEO, said: “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.”

Cardano urged trustees and
scheme advisers to hedge out
interest rate and inflation risks,
ensure they have diversified their
portfolio by “aiming to minimise
risk in UK assets”, and assessing
the impact of Brexit on company sponsors.
Theresa May has been meeting with EU leaders today after
postponing a parliamentary vote on the withdrawal
agreement she struck with the bloc last month. She has met
German chancellor Angela Merkel and Dutch prime minister
Mark Rutte today.

Should the agreement be passed by the UK parliament –
resulting in what Cardano called a “soft Brexit” – the
consultancy predicted a 24% reduction UK schemes’ combined
deficit on a buyout basis, equivalent to a £138bn fall in the
shortfall.

“With some of the major uncertainties of the UK’s future
relationship with the EU removed, a more favourable Brexit
would enable growth to improve and with limited slack in
the British economy, could increase the pace of [interest] rate
hikes, strengthen sterling, push up gilt yields and soften the
performance of the FTSE 100,” Cardano said.

Source : https://www.ipe.com/brexit/