The overall funding level of pension schemes could be hit by around 5 per cent in the event of a no-deal Brexit, XPS Investment has warned.

Issuing its Brexit update – a pension investment perspective today, 24 January, XPS Investment chief investment officer Simeon Willis warned that no deal could reduce the funding level of schemes by 5.3 per cent, while a “good deal” could see overall funding grow by 5 per cent.

Willis said: “Roughly speaking a typical scheme might be 5 per cent worse off with a no deal and 5 per cent better off with a good deal.”

According to XPS, “typical” scheme liabilities could rise by 15 per cent, offset slightly by an asset rise of 7.4 per cent, while a good deal would see 12.5 per cent fall in liabilities and a 7 per cent fall in assets.

“Where we find ourselves now is that markets are pricing in the possibility of a no deal Brexit,” he added.

“The two things that weren’t effected the way we expected was currency and gilt yields and on reflection this was because a no-deal Brexit was already being thought about and to some extent captured at that point already.

“If gilt yields rise that’s generally a good thing for all schemes, because most schemes are less than fully hedged.”

Furthermore, Willis added that even a good deal could have a sting in the tail in regards to currency, particularly for schemes which have substantial unhedged overseas holdings.

“Some schemes, as we know there is no such thing as an average scheme, will be very exposed to these factors and we could see a good deal hitting some schemes in a way they weren’t expecting, which they need to be cautious of,” he said.

“The general ethos which we say to clients is it’s better to be immune to both sides of this equation that to one side of the other, because the outcome could be quite binary. Just think about how you make the scheme resilient in the face of uncertainty in the longer term.”

According to Willis, schemes should be thinking about lower interest rate hedging inflation, currency hedging and reducing exposure to UK equities, but conceded that it was a bit late in the day to make some of these changes.

Last week, industry members expressed their concern over the future of pensions and the impact on consumers following the heavy defeat of Prime Minister Theresa May’s Brexit deal.

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