No-deal Brexit could see pension fund deficits rocket by more than £200bn

● Fall in gilt yields and weakening of sterling would increase scheme shortfalls

The impact of a no-deal Brexit could see the total deficit of UK pension funds rise by as much as £219 billion, a risk-management firm has warned.

Cardano said the 37 per cent rise in deficits would be triggered by a combination of falling gilt yields, a further weakening in sterling and rising inflation. The company said that while the terms of the UK’S departure, including the extent of any transitional arrangements, remain the subject of fierce debate, UK trustees and corporate scheme sponsors must be ready to react to the consequences.

Cardano has forecast that a hard Brexit scenario could trigger a 14 per cent rise in aggregate UK pension liabilities. That is despite such an exit driving a 6 per cent rise in UK pension scheme assets on the back of currency tailwinds and the fact that a potential fall in sterling would be positive for the international constituents of the FTSE 100.

However, a soft Brexit scenario could cause the UK’S aggregate buy-out deficit to fall by £138bn, a 24 per cent reduction from current levels, driven principally by a 9 per cent fall in liabilities, easing the funding challenge for scheme trustees across the UK.

Cardano said that with some of the major uncertainties of the UK’S future relationship with the EU removed, a more favourable Brexit would enable growth to improve. With limited slack in the British economy, it could increase the pace of bank rate hikes, strengthen sterling and push up gilt yields.

Kerrin Rosenberg, UK chief executive officer at Cardano, said it was vital for UK pensions schemes to “think critically about the scale and scope of risks that Brexit may present and to act now”.

He said: “Since the EU Referendum we have had this political event dominate the markets’ mood and attention – yet the quantum and characteristics of the potential market and economic impacts remain relatively unknown.

“This is a tail risk with a difference because the date of the UK’S exit is known. The runway into 29 March should allow UK schemes and their advisers to prepare for the worst – even if the eventual outcome ultimately surprises on the upside.”

Latest figures from PWC showed the total deficit of all defined benefit (DB) pension funds in the UK stood at £230bn at the end of November, unchanged from the previous month.

Pwc’s Skyval index, which compiles data from 5,600 UK DB schemes, showed liabilities at £1.8 trillion and assets at £1.57tr.