Trump election cancels out Brexit effect

The inauguration of Trump has cancelled out the effects of Brexit for UK DB schemes. The collective UK Defined Benefit (DB) pension scheme deficit is back below £790bn, from an all-time high in excess of £1trn in the aftermath of Brexit. This swing of more than £200bn underscores how volatile deficits can be and the importance of managing scheme risks and the improvement in deficit positions could create a significant opportunity to reduce risk for some DB schemes

Hymans Robertson’s 3DAnalytics, which provides real-time updates on the collective DB pension schemes’ funding positions through its UK DB Index, has shown that the total deficit has gone back to pre-Brexit levels. The primary drivers have been a rise in bond yields due to higher inflation expectations, combined with a fall in the value of the pound.

Shrinking deficits

Commenting, Jon Hatchett, head of corporate consulting at Hymans Robertson, said: “The inauguration of Trump has led to deficits shrinking to levels not seen since the eve of Brexit. In aggregate terms for UK DB schemes, the two biggest political shocks of last year have cancelled out, like matter and anti-matter colliding and exploding in a ball of light.

“At the scheme level there will be big winners and losers.  On the world stage, like the rest of us, UK pensioners are all worse off with their spending power overseas having fallen dramatically. On the flip side, those schemes who invested overseas without hedging currency will have seen big funding gains as the pound has dropped.

“Inflation has been the other big driver. Schemes which haven’t hedged and have large inflation exposures will have suffered pain. Their members will have their spending power protected but at the cost of a falling funding level. In contrast, those schemes with fixed liabilities will have seen funding gains as the market is pricing in a deflating away of their members’ spending power in the years ahead.

Extremely volatile

Discussing what this means for DB schemes, Hatchett added: “If the experience of the past year teaches us anything it’s that deficits can be extremely volatile. And it’s reasonable to expect even more volatility in the weeks and months ahead. But these huge gyrations in headline funding figures should not knock schemes off course. A long term focus needs to be maintained through short term uncertainty.

“Despite the improvement in the aggregate DB deficit position since the summer, many companies face record funding deficits in their 2017 valuations due to low interest rates. DB schemes continue to pose a material risk for many companies. However, obsessing solely on deficits can lead to significant cash calls on sponsors and distract from what is important – ensuring there’s a good chance of paying benefits to pensioners in full and that there’s a healthy business sponsoring the scheme. A balance needs to be struck.”

Discussing the tactical opportunities this provides for scheme sponsors, he concluded:

“This rise in the funding position will be very welcome and throws up opportunities to remove risk.  For sponsors with dollar earnings, while the aggregate deficit is now the same in £ terms, in $ terms it is nearly 20% smaller than on 23 June.  Like many UK assets, for overseas buyers UK buy-ins are a lot cheaper than they were in the first half of last year.  For many schemes, the backdrop for investing in assets that back the payments to pension members is the most attractive it’s been for some time.  Those that can afford to reduce risk should do so. With macroeconomic and political uncertainty writ large, now is not the time to bet the house.  Sponsors and trustees should not leave better futures for their DB schemes down to chance.”

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