There has been much debate about what kind of Brexit is going to occur, given the limited progress and lack of consistency or transparency around the UK’s negotiating position.

The only thing we can seriously plan for at this stage is a so-called ‘Hard Brexit’, where the UK leaves the EU without an agreement on the future trading relationship (or a transition period), and reverts to World Trade Organisation (WTO) rules.

Certainly, the UK could weather the storm and would likely recover eventually – but it is unlikely that the economy will surpass where it would be had we simply continued the current EU trading arrangements. Seeing any growth post-Brexit is not a ‘dividend’ if it is less than we would have grown without Brexit.

But we must differentiate between the ‘economic’ impact of WTO rules and the ‘investment’ impact. For pension schemes, the investment impact will be much more immediate, as the markets will immediately price in the WTO arrangements, irrespective of the political fallout. For pension schemes, unlike most of the real economy, there might truly be a tangible Brexit dividend.

How should pension schemes prepare?

Revisit hedging of liability interest rates and currencies. Review exposure to UK equities relative to other markets. And be prepared to think strategically, beyond just market movements: covenant implications; new funding approaches; accelerating de-risking; and preparing action plans proactively, together with the sponsor. The worst thing would be to merely react to events. Doing nothing is not a sensible option.

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