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Published on June 13th, 2016 | by Prospect

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Would Brexit push pension funds over the brink?

By Phil McEvoy, Prospect Pensions Officer

The scaremongering has continued on both sides of the EU Referendum debate and, as ever, it is difficult to know where the truth lies. I’ll offer an opinion on what Brexit could mean for pension funds in the short term.

My own view is that the long-term economic position may not be swung too much either way (although we will never know, unless someone has secretly invented a parallel universe generator). However there does seem to be some compelling opinion that there will be short-term shockwaves causing uncertainty. Now, if I was responsible for pension scheme funding policy, short-term issues would have limited impact. But I am not; and they do.

If there was to be a period of economic uncertainty (even a limited one), it is likely to have an impact on confidence, sales, investment levels and yields. These will all have an impact on defined benefit pension valuations, which look at prevailing investment values and base future assumptions on market positions. A downturn (even a blip) will feed through to higher deficits in pension funds, locking employers into higher contributions for years to come. These schemes, still feeling the effects of the 2008 crash and subsequent recession, will be under immense pressure. This would be likely to:

  1. encourage employers to cease accrual in those schemes that are still open
  2. require larger deficit payments from sponsoring companies
  3. ultimately drag some employers into insolvency with a pensions deficit that they cannot afford.

That last doomsday scenario is extreme, but it is happening now and, if deficits rise in the future, it is highly likely to increase the chances of pension-related insolvencies.

Scaremongering – I don’t believe so.  Scary – yes.

 

 


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