Existential risks are the biggest threat to UK defined benefit pension schemes investment returns, a leading economist has warned.

Speaking at the annual Pensions and Lifetime Savings Association (PLSA) Investment Conference yesterday, 6 March, PGIM Fixed Income chief economist, Nathan Sheets, said that volatile tail risks from Brexit and global trade wars will be very difficult for pension funds to hedge going forward.

Delivering a speech on the impact of trade wars on the financial markets, the former Under Secretary of the Treasury for International Affairs added that, for the moment, it was not clear how investors can protect themselves against volatile markets.

“It feels as though it’s a lot of idiosyncratic existential risk which is really hard to hedge. Maybe there are certain ways to protect against sharp movements because I think that is the biggest risk," Sheets said.

“The baselines are okay, it’s the tail risk that something happens, ‘somehow Britain doesn’t get what it expects, somehow Britain crashes out’ … what if Trump goes to town on tariffs, how do we hedge and how do we survive those severe tail scenarios, it’s not clear to me.”

According to Sheets, investment has been slow since the global financial crisis, which has led to a fragmentation of the global trade markets.

He added that many of the risks come from not knowing whether President Trump will escalate the trade war with China, and also whether he will turn his attention to the to the European Union automotive sector.

The two scenarios, while they are a considerable risk, Sheets believes are unlikely to happen.

“The wind has blown more and more towards de-escalation, I am increasingly confident … for de-escalation. It is quite clear that President Trump and President Xi Jinping are going to be meeting in March, it also seems that the negotiations are making progress.”

“Will the trade war proliferate to the auto sector? I would put about 25 per cent probability on this, but it is a distinct risk.”

According to Sheets, while negotiating with China, the US has also been doing its own research on how it can claw back some of the $200bn deficit in auto production, a majority of which is with the European Union.

Continuing the theme of uncertainty, Institute for Fiscal Studies director, Paul Johnson, warned that the Office for Budget Responsibility is unable to develop a model on a no-deal Brexit, meaning that we simply “don’t know” what effect it will have on the economy.

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