A hard Brexit scenario could result in a £219bn increase in the aggregate buyout deficit of UK pension funds, according to Cardano.

After examining the Purple Book, published last week, it found that the increase would represent a 37 per cent rise from current levels if a Brexit deal is not agreed.

It also found that a no deal scenario could trigger a 14 per cent rise in aggregate UK pension liabilities, driven by the impact of falling gilt yields, decreasing interest rates, weakened sterling and a rise in inflation on schemes’ long-term pension obligations.

Although a hard Brexit could result in a 6 per cent rise in pension scheme assets, driven by currency tailwinds, it would be outweighed by the ride in liabilities and widen the UK’s aggregate funding gap.

Commenting on the findings, Cardano UK chief executive officer, Kerrin Rosenberg said: “The risks to schemes’ funding positions should not be underestimated and we would encourage UK schemes to think critically about the scale and scope of risks that Brexit may present and act now – before it’s too late.”

Despite this, a soft Brexit could cause the UK’s aggregate buyout deficit to fall by £138bn, down by 24 per cent from current levels, principally driven by a 9 per cent fall in liabilities.

Cardano reported that, with some of the major uncertainties surrounding the UK’s relationship with the EU removed, a “more favourable” Brexit could enable growth to improve, increase the pace of bank rate hikes, strengthen sterling, put up gilt yields and soften the performance of the FTSE 100.

Rosenberg added: “Brexit presents a very different challenge to UK pension funds, financial markets and the national economy.

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

“As we enter into 2019. Brexit will be just one of a range of risk factors that schemes should be proactively addressing in their portfolio positioning.”

Ahead of an uncertain Brexit outcome, Cardano advised trustees and their advisers to: adjust their investment strategy based on the impact of a hard Brexit, hedging interest rate and inflation risk using an LDI toolkits and limiting the impact of different Brexit scenarios on the growth portfolio through diversification.

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