Senior voices from the UK’s pensions industry have urged long-term investors in defined benefit pensions to sit tight until the initial volatility following the ‘Leave’ vote flattens out, despite deficits reaching a record £900 billion overnight.
But those in defined contribution pension plans face diverging futures, as long-term investors can hold on, while those retiring in the next few years face major difficulties, experts said.
Hymans Robertson said the hole in DB pension funding had increased from £820 billion on June 23 to £900 billion following the referendum result. Overall, UK DB liabilities reached £2.2 trillion on June 24, the firm said.
Rather than immediately react, Danny Vassiliades, head of investment consulting at Punter Southall, said: “Pension schemes have to buckle down and brace themselves to wait out the storm. This is the start of a journey for schemes, not the end, though the headwinds have undoubtedly grown stormier. The destination is less certain and the vehicle to get there less stable.”
He urged investors to avoid a knee-jerk reaction: “Don’t transition assets, don’t react to short-termism and don’t lose your focus on your long-term goals.”
Toby Nangle, head of multi-asset at Columbia Threadneedle Investments, said his team – like others in the industry – had carried out in-depth analysis on the potential fall-out of a Leave vote and though market movements had been dramatic, they were within his accepted parameters, suggesting assets were still reasonably valued.
In addition, with a drop in sterling, UK investors could find themselves in a better position when owning overseas assets.
Nangle said: “If there was a further collapse, it would be a test, but we are not traders, we are long-term investors and there could be buying opportunities.”
However, on the liability side of the equation, Nangle said the next few years of political limbo could be less bright.
Stewart Hastie, pensions partner at KPMG, agreed, saying that the Brexit vote had brought about uncertainty for UK pension deficits, which, with only one in five schemes being fully funded at the end of May, according to the Pension Protection Fund, posed some challenges.
Hastie added: “The UK’s 6,000 private sector DB schemes covering £1.6 trillion of pensions obligations will be in for a rough ride, hit with the prospect of higher inflation and an expected fall-off in pension asset values over the next couple of years. Long-end government bond yields will likely stay stubbornly low, keeping pension liability values high and meaning pension deficits are likely to increase and be more volatile.”
Hastie said that with some 2,000 schemes due to have a funding review in the next 12 months, UK businesses would be under pressure to divert cash to shore up historic pension liabilities.
Joanne Segars, chief executive of the Pensions and Lifetime Savings Association, said the regulatory impact on pension funds, which included solvency rules, would become clear in the next few weeks and months.
Segars said: “It is essential that the UK government and policymakers in Brussels now act swiftly and decisively to manage current volatility and announce a clear plan to renegotiate our future relationship with the EU.”
For defined contribution pensions, however, the message was even less straightforward.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “For long-term pension investors who may be seeing the value of their retirement savings falling today, the key message is to do nothing unless you have to.”
He said acting in haste during a period of market volatility and uncertainty in the wider economy, in these conditions, was unlikely to serve well.
McPhail said: “If you are years from retirement and making regular savings, then just keep going; falls in the market mean buying investments at a lower price.”
Brian Henderson, DC & financial wellness partner at Mercer, said: “This is going to be a more turbulent time for DC members looking to provide income from their retirement savings. Many people could now see their financial health and their pensions suffer some short-term volatility.”
Henderson said that those planning for the future may have to scale back on their aspirations.
He said: “While long-term savers may be able to navigate the choppy waters, those with more immediate needs may find themselves taking in water. Anyone seeking security, whether it’s coping with debt repayment or perhaps seeking an income for life, may find themselves particularly vulnerable.”