Pension trustees called upon to engage with sponsors to mitigate Brexit impact

Pension scheme trustees should engage with scheme sponsors to reassess investment strategy and funding levels following the Brexit trade agreement, according to Herbert Smith Freehills.

The firm warned that the impact of changes in the UK's trading and legal relationship with the EU could have positive or negative effects on asset values, investment returns and exchange rates over the longer term, stressing that these trends will need to be monitored closely.

Furthermore, it stated that trustees of defined benefit (DB) schemes in particular should obtain updated advice on the impact of Brexit on their scheme’s investment strategy and any actions needed to mitigate any downside risk.

Trustees of defined contribution schemes were urged to review the investment funds available to members and consider whether their investment advisers remained appropriate.

The firm also noted that whilst the relative certainty of a deal could lead to greater stability, market volatility and the economic impact of changes in the UK's legal and trading relationship with the EU may impact the funding level of DB schemes.

Considering this, it suggested that both sponsors and trustees consider how this may impact funding and security arrangements in place, noting that the impact of any contingencies being triggered on the sponsor’s business should also be assessed.

Herbert Smith Freehills also urged scheme sponsors to reconsider the potential impact on their own business, stressing that, to the extent that they haven’t already been implemented, contingency plans should be actioned by businesses to address the material risks associated with Brexit.

For example, this could include setting up new subsidiaries, acquiring regulatory approvals in the EU or the UK, and preparing for changed distribution channels.

Furthermore, it emphasised that trustees should be considering the potential impact of the changes on their sponsor’s business and how this may affect its support for their scheme.

The law firm stated: "Assessing the potential impact of these changes is particularly urgent where a scheme’s sponsor is already struggling as a result of the ongoing impact of and disruption caused by Covid-19.

"Trustees should also engage with their scheme’s sponsor to check what steps have been, or are being, taken to address any material disruption or risks to the sponsor’s business."

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