Trustees should prepare for potential euro-zone break up - Towers Watson

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  • Trustees should prepare for potential euro-zone break up - Towers Watson

EUROPE - Many companies are developing euro-zone break-up plans for their businesses, but not their pension funds, Towers Watson has warned.

The consultancy said trustees and sponsoring employers would do well to think about the different ways in which a break-up could affect their schemes.

During a briefing conducted by the consultancy firm Towers Watson, nearly two-thirds of delegates reported that a euro zone break-up plan for their business was in place or were in the process of putting one together, while only one-tenth said they had or were in the process of developing such a plan for their pension funds.
Alasdair Macdonald, head of investment strategy, said: "A euro zone break-up could be triggered by countries with weak economies falling out of the bottom or by countries with strong economies climbing out of the top. 

"The consequences for the euro's exchange rate against other currencies would be very different depending on which countries stayed in the euro and which left."

According to Macdonald, schemes trying to anticipate how a euro-zone break-up would affect them could start by thinking through practical details such as which assets could be redenominated in local currencies, whether any of these could conceivably be subject to capital controls, and what would happen to contracts denominated in euros but written outside the euro-zone.

Macdonald also stressed that trustees and sponsors should ask "fundamental" questions such as the impact on different asset classes and the covenants of scheme sponsors.

He also pointed out that, while the euro-zone crisis is primarily a risk for pension schemes, it could also present some opportunities.

"Unless and until the crisis is definitively resolved, conditions are likely to remain volatile, so the cost of various de-risking options should fluctuate," he said.

"Schemes that want to be able to take advantage of short-lived windows of opportunity should think about the prices at which they would be willing to trade and get their ducks in a row so they are ready to act."

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