At the time of writing, we are now only weeks away from the UK referendum. The rhetoric is heating up, but no one really knows what the true implications of BREXIT will be and what trade agreements will be agreed. Will this have a significant impact on UK pension schemes?
A substantial amount of EU pension law has been incorporated in UK legislation, to the extent that Britain is no longer bound by EU law following BREXIT. Therefore, in the short term there will be NO significant impact, but a long transition period following the vote will ensue and therefore Trustees should be mindful and alert to the potential risks that could arise.
On a daily basis, the ways in which UK pension schemes operate is unlikely to change, but the areas most likely to be affected are the strength of the employer covenant and investment growth based on the effect BREXIT could potentially have on the financial markets.
Trustees should regularly monitor the strength of the employer covenant. This means understanding the current and prospective financial position of the sponsoring employer. DB schemes should be alive to this risk and seek regular assessments.
Trustees should engage with investment advisers to ensure they mitigate against the potential market volatility. If the UKs credit rating was downgraded this could have implications for bond prices and gilt yields. For DC schemes Trustees should monitor the ongoing appropriateness of investment options, and also take advice on the likely impact of BREXIT on the performance of current investment options.
What is certain is that come 24 June there will be a period of work where new or different relationships are developed with the EU, or bridges are rebuilt!
Ensors can provide a tailored employer covenant review to suit your scheme. Please contact a member of the pensions team for more information.
