Panic Not Answer to U.K. Pension Deficit Surge Post-Brexit

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By David B. Brandolph

Aug. 3 — Large pension plans in the U.K. on average faced soaring funding deficits in the weeks after the vote to exit the European Union, but plan fiduciaries shouldn’t panic, a consultant told Bloomberg BNA.

Corporate sponsors and fiduciaries of U.K. defined benefit plans need to “take a deep breath” and then carefully assess how Brexit is affecting both the corporation's finances and the plan's funding, Le Roy van Zyl, senior consultant in Mercer’s financial strategy group in London, told Bloomberg BNA Aug. 3.

Armed with such assessments, sponsors need to communicate with fiduciaries to ensure that they don’t have a “knee jerk” reaction to recent events, he said.

Plan sponsors need to open a “clear line of communications to trustees” since the “nature of pension management is that it only works when people work together,” van Zyl said.

Soaring Plan Deficits

This calming advice follows a Mercer LLP monthly pension risk report Aug. 2 indicating that the aggregate deficit for the plans sponsored by the U.K.’s 350 largest companies has soared since the Brexit vote on June 24.

The survey includes such British companies as Royal Dutch Shell, BP, Unilever, WPP and Rio Tinto, van Zyl said.

The deficit, which stood at $130.5 billion on May 31, rose nearly 42 percent over the next two months, reaching $185 billion by the end of July, the report said.

The increase resulted from a plunge in interest rates for high-quality corporate bonds, an 85-basis-point drop from 3.15 percent at the end of May to 2.30 percent as July closed, according to Mercer's report.

Rates had been falling even before Brexit from 3.68 percent on Dec. 31, 2015, but the drop in the past two months was more dramatic, van Zyl said.

Pension liabilities, which increase as interest rates drop, reached a record high of $1.139 trillion at the end of July, the report said.

The survey is “just an average,” and the financial position of plans surveyed can vary a lot, van Zyl said. Some of the companies actually have a surplus, he said.

Open Communication Needed

The form of the exit from the European Union won't be decided for months or even years, so sponsors and fiduciaries have time to consider how they will be affected, van Zyl said.

Plan fiduciaries need to assess the seriousness of the situation for their plan, he said. Plans with large deficits don’t need to worry that much if they are backed by a strong company, van Zyl said. Some companies will benefit from Brexit while others will face a more uncertain future, he said.

Plan trustees set a plan's investment strategy and have a great deal of independence in the U.K., van Zyl said. Consequently, in some cases, plan sponsors may need to reassure trustees to prevent them from rushing into an inadvisable action, such as selling a large portion of a plan’s equities in favor of U.S. Treasuries, he said.

Such decisions should be made only after careful thought, van Zyl said.

Trustees may ask a sponsor to provide more cash to the plan to overcome deficits, van Zyl said. However, he said sponsors shouldn’t add more cash to the plan than they deem appropriate. Instead, a sponsor could consider providing the trustees with security, such as contingent cash, for example, where the sponsor promises to add more cash if the plan’s situation doesn’t improve within a certain time, he said.

To contact the reporter on this story: David B. Brandolph in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

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