Low bond yields, risk of rising inflation to exacerbate post-Brexit deficits

Rising inflation, volatile markets and “stubbornly low” bond yields will see UK pension funds faced with increasing deficits, consultants have predicted in the wake of Britain’s decision to leave the EU.

Consultants variously warned that pension funds were in for a “rough ride” as equity markets around the world adjusted to the British electorate’s vote to depart the Union, and would be faced with volatile exchange rates as sterling fell to lows not seen in 30 years.

Stewart Hastie, a pensions partner at consultancy KPMG, predicted rising UK inflation and a drop in the value of pension assets in coming 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.

Meanwhile, Deborah Cooper, partner at rival consultancy Mercer, urged pension trustees to monitor market events “closely” and consider its impact on future funding and sponsor covenants.

“Boards should review exposure to currency risks and how that might affect future investment strategy and current funding levels,” she added. 

Bob Scott, partner at LCP, highlighted the small benefit some funds might derive from the decline in sterling’s value.

“While this uncertainty is unlikely to be good news for pension schemes, it is worth noting those schemes with significant unhedged overseas investments could actually see their asset values increase – at least in sterling terms,” he said. 

However, the Pensions and Lifetime Savings Association called on the government to address the market uncertainty, while stressing the long-term nature of investments held by its members.

Joanne Segars, the association’s chief executive, said the volatility was “expected but still unnerving”.

“Even though pension schemes are long-term investors with diversified portfolios, continued uncertainty and the increased volatility that goes with it makes it difficult for schemes to protect savers’ interests,” she said.

She urged the British government to “reassure” markets.

“[The government] and policymakers must quickly turn their attention to making clear their long-term plan for the UK, its economy and its place in the European and global markets to protect pension schemes and their savers,” she aid.

Segars earlier on Friday warned that the UK’s departure from the EU would not immediately see changes to UK pension legislation, noting certain areas would need to be “disentangled”.