DB liabilities could change by £70bn due to Brexit
A shift in longer dated gilt yields of 0.3% triggered by a Brexit could change defined benefit (DB) liabilities by £70bn according to the Society of Pension Professionals (SPP).
In a report called Would Brexit benefit or be detrimental to UK pensions?, the SPP cited The Pensions Regulator (TPR) and Pension Protection Fund (PPF) who both say a fall or rise in gilt yields of 0.3% could increase or reduce liabilities by £70bn.
SPP chairman of the investment sub-committee Robin Penfold said: "You could envisage a scenario where gilt yields are higher or lower. If interest rates were to rise on the back of Brexit that would be good news for pension fund surpluses as it would take some of the strain off pension funds. So there is a paradoxical element there. The markets might be thinking negatively but paradoxically that would have a beneficial effect in terms of reducing deficits."
Mark Dowsey, who is a member if SPP's European sub-committee added: "There are other investment implications. If there is a vote to leave there are going to be some companies which do well and other companies which do less well than they might have done. That is going to affect their covenant and ability to support schemes."
The report also examined four potential models the UK could follow if it leaves including the ‘Norwegian model' where the UK would be a member of the European Economic Area (EEA).
In this scenario the UK would have to abide by pensions law set by the European Union (EU) without any input into policy.
This includes the Institutions for Occupational Retirement Provision (IOPR) directives or Solvency II.
If the UK went for the ‘Swiss model', Britain would not need to follow EU pension law.
The two other models are a customs union between the EU and UK similar to what Turkey has. There is also a ‘free trade model' where the UK would forge a relationship with the EU like Canada.
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