The Pensions Regulator (TPR) in the UK is warning schemes to stay focused on the longer term and avoid knee-jerk reactions as market volatility following the country’s EU referendum sparks fears about funding plans and investments.

Andrew Warwick-Thompson, executive director for regulatory policy at TPR, said: “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.”

This week, data from the Pension Protection Fund (PPF) showed the average funding ratio of UK defined benefit (DB) schemes had deteriorated to 78% – only just above May 2012’s lowest recorded level of 76.5%.

Funding ratios have been hit after the Brexit vote on 23 June, followed by heightened market volatility and falling bond yields.

In its guidance statement issued yesterday, the regulator set out to trustees of DB and defined contribution (DC) schemes a series of messages and key areas for action in light of the vote.

“Our key message to trustees and sponsors of occupational schemes is to remain vigilant and review their circumstances but continue to take a considered approach to action with a focus on the longer term,” the statement says.

“It is too early to understand or assess the full consequences of the outcome of the EU referendum in detail.

“However, we expect trustees to have an open and collaborative discussion with their sponsor about the possible effects to their business.”

Warwick-Thompson said contingency planning was 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,” he said.

At this point, the regulator expects trustees of DB schemes to review their employer covenant to understand how Brexit could affect it, he said, adding that they should also consider how market volatility has affected scheme funding.

“Trustees should carry out the review as part of their ongoing risk management approach, as set out in our integrated risk management guidance and DB code of practice,” Warwick-Thompson said.

They should consider issues relating to liquidity and cash flow management, he added, and if they conclude that the scheme faces an inappropriate level of risk, TPR expects them to think long term and review 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,” he said.

Stephen Soper, senior pensions adviser at PwC, said the guidance highlighted the growing importance of trustees and sponsors understanding future cash flows and their ability to absorb and respond to risks as their pension schemes matured.

“Understanding the strength of employer covenant, the factors that may cause support to falter and developing credible mitigation plans are now an imperative feature of scheme governance,” he said.

Soper was head of DB regulation at TPR until last summer, and spent 20 months as its interim chief executive.

Meanwhile, Aon Hewitt cautioned against inaction by trustees.

Partner Matthew Arends said the firm completely agreed with the regulator that trustees should consider their circumstances carefully before acting and keep a long-term view. 

“However, that does not translate into doing nothing,” he said.

“A decision to stop previously agreed actions – or not to start new ones – could, in time, prove to be detrimental.” 

The key is instead to re-assess pension schemes situations actively and develop an appropriate action plan, he said. 

“Trustees – and employers – should be asking actuaries for an updated funding level if this is not available online, and understanding whether they remain on course with their funding plans,” he said.

Investment consultants should be asked to advise on the suitability of the scheme assets, Arends said, and particularly the degree of hedging in place.