TPR: Beware knee-jerk reactions to Brexit volatility

Andrew Warwick-Thompson, TPR
Andrew Warwick-Thompson, TPR

Trustees should not make knee-jerk reactions to short-term market fluctuations created by Brexit uncertaintly the Pensions Regulator has warned.

But advisers say swift action can still protect schemes and trustees should get up to date valuations and formulate an action plan.

TPR has issued a guidance statement to pension trustees following the UK’s vote to leave the EU, guiding them in responding to the market volatility that has led to uncertainty about scheme funding plans and investments.

The statement emphasises that trustees should as a matter of course be regularly reviewing the circumstances of their scheme, but they should remain focused on the longer term and not be overly influenced by short-term market fluctuations.

TPR says it is too early to assess the full impact of the referendum result, and volatility may continue for some weeks or months. It says it will continue to monitor the markets and other economic developments, and will provide more guidance to trustees of both defined benefit (DB) and defined contribution (DC) schemes if and when it is necessary.

TPR executive director for regulatory policy Andrew Warwick-Thompson says: “Pension schemes plan and invest for the longer term and our message to trustees is not to over-react to the current volatility. We will provide support and clear direction to trustees and other parties to help them through the uncertainty ahead.

“Contingency planning is an integral part of the effective stewardship of pension schemes. We expect trustees to review their plans and how they interact with current circumstances on a regular basis.

“At this time we expect trustees of DB schemes to review their employer covenant to understand how the vote to leave the EU could affect it. Similarly, they should consider how market volatility has impacted on their scheme’s funding position.

“Trustees should carry out the review as part of their ongoing risk management approach. They should include consideration of issues relating to liquidity and cash flow management. Where their assessment results in the conclusion that the scheme is exposed to an inappropriate level of risk, we expect trustees to take a long-term view and review their investment strategy in that context.

“In time, as implications become clearer, trustees of schemes with money purchase benefits may also consider it appropriate to make changes to the investments included in the scheme’s default arrangement or the investments offered to members.”

Aon Hewitt partner Matthew Arends says: “We completely agree that pension scheme trustees should consider their circumstances carefully before taking action and retain a long-term view.  However, that does not translate into doing nothing; a decision to stop previously agreed actions – or not to start new ones – could, in time, prove to be detrimental.  On the contrary, we believe the key is to re-assess actively the pension scheme’s situation and to develop an appropriate action plan.

“For DB pension schemes, the Regulator’s Integrated Risk Management framework provides a clear way of quickly understanding the new circumstances.  We believe trustees – and employers – should be asking actuaries for an updated funding level if this is not available on line, and understanding whether they remain on course with their funding plans.  The scheme’s investment consultants should be asked to advise on the suitability of the scheme assets, particularly the degree of hedging in place.  And, of course, the employer’s covenant will need to be re-evaluated in the new environment.  Depending on where schemes are in their valuation cycles, a re-evaluation of the position may be needed.”