Defined benefit (DB) scheme liabilities are likely to rise after 10-year gilt yields fell below 1% for the first time ever following last week's Brexit vote.
Coupled with expected lower asset returns amid the market volatility resulting from the historic decision, schemes and sponsors are being warned to expect higher funding deficits.
The 10-year benchmark yield dropped 15 basis points on Monday (27 June) to 0.93% as investors snapped up gilts as safe haven assets just days after the EU referendum.
Russell Investments head of client strategy and research EMEA David Rae estimates liabilities to have risen by 8% to 10% since the Brexit vote and in aggregate schemes could face a 10% hit to funding levels depending on the level of liability hedging in place.
"Asset returns will have clearly been impacted by the falls in risk assets on a global basis," he said. "The gilt market is pricing in the heightened political and economic uncertainty as well as the possibility of further monetary policy stimulus. The equity market reaction has been less pronounced than the gilt market reflecting a view of further central bank intervention."
Irwin Mitchell pensions partner Martin Jenkins called the fall in 10-year yields "bad news" for DB schemes and warned deficits would grow.
"Schemes will come under more pressure and we could see more seeking help from the Pension Protection Fund. Firms with defined benefits schemes will have increase the amount invested into the pensions to protect the level of benefits promised."
Schemes have been dealing with the double whammy of low yields and equity market volatility for some time, but the situation has worsened following the UK's decision to quit the EU.
Aviva Investors' global investment solutions head of investment strategy John Dewey said: "The dangerous assumption that gilt yields can't go any lower has once again been brought to the fore. Investors should avoid highly volatile markets with impaired liquidity for large scale liability driven investment trading, but not delay in search of the elusive ‘perfect time to hedge'.
"Over the medium term, any weakening in sterling will lead to higher inflation prints and higher inflation-linked liability payments, accentuating pension funds' short term cashflow demands.
"For investors aiming to meet liabilities, widening spreads on corporate bonds and private assets may provide effective opportunities to lock in higher returns, with greater protections and more diverse drivers of return. Investing in long dated, secure real assets remains a valuable component of an investment strategy."
It comes as Hymans Robertson released data last week showing the total deficit of DB schemes had increased by £80bn to £900bn in just one day after the 23 June referendum on the country's EU membership.
