Check the lifeboat is seaworthy. Why pensions face stormy waters post-Brexit.

by Andrew Fleming

For the first time ever the yield on a two-year UK Government bond turned negative this week, presenting even more challenges to an already pressurised pensions sector.

Pensions have been grabbing the headlines of late and for all the wrong reasons. From the assets to liabilities gap of the British Steel Pension Fund to the £571 million deficit in the BHS pension scheme the gloom in the sector is palpable.

The skies have darkened further in the last week when one immediate and tangible result of the Brexit vote was a further fall in gilt yields, which were already at historically low levels. In fact the two-year Gilt yield turned negative for the first time ever.

Plummeting gilt yields have profound implications for the UK’s pensions industry. Lower gilt yields have contributed, along with increasing life expectancy, to a significant widening of deficits in the UK’s 6,000 Defined Benefit pension schemes, and their millions of members. Bigger deficits mean greater pressure on sponsoring employers to stump up extra cash to plug the gaps – cash which could otherwise have been re-invested in their businesses or paid out in dividends to investors (including pension funds).

The challenge for pension funds and their asset managers – who have their own operational concerns post-Brexit – is to devise investment strategies which achieve deficit-narrowing returns, while managing cost and volatility. It remains to be seen how many can achieve this, particular in the current uncertain investment environment.

The Pension Protection Fund, the industry “lifeboat”, will be ensuring it is shipshape to face what could be a perfect storm.