More than half of pension scheme representatives say their scheme is not doing enough in reaction to the situation in Ukraine. Engaging with the scheme sponsor is important now – and TPR says so is preparing for liquidity constraints, an increase in cyber attacks and reassuring members. 

 

Market movements have been in focus for many investors since Russia invaded Ukraine on 24 February. Stock markets have fallen and remain volatile, and major index providers have removed Russian stocks from their emerging market indices or said they would do so by the end of March. Credit spreads have increased, and so have gilt yields, noted Simeon Willis, chief investment officer at consultancy XPS Pensions Group, speaking at an event organised by XPS on Monday. 

 

The changes in markets and unprecedented sanctions have left 53.7% of participants feeling that their scheme is not doing enough in response to the situation. 

 

 

However, David Fairs, executive director of regulatory policy, analysis and advice, said schemes’ passive exposure to Russia – which is now being removed by index providers – had been small, and while some large schemes had direct exposure, they reduced their exposures in the lead-up to the invasion. Writing Russian assets down to zero would not have a big financial impact on schemes therefore, he noted. 

 

There are also practicalities that mean divesting is easier said than done – any potential buyer could be subject to sanctions, for example. “Over the weekend, both the FCA and TPR set out that for schemes looking to divest there are some practical challenges, and they have got to be cognisant of the sanctions regime,” said Fairs. However, the heightened volatility in stock markets means trustees should think carefully about the liquidity in their schemes, he added. 

 

During times of volatility, giving reassurance to members is also important, he said; trustees should remind younger members that they are in for the long term and should think very carefully about taking short-term decisions in light of what is going on. 

 

But for the regulator, perhaps the greatest concern is about scheme sponsors, which could be impacted directly and indirectly through their supply chain, manufacturing capability and the wider economic environment. Trustees must “look very closely at what’s happening to the sponsor”, Fairs said, pointing to guidance TPR issued last November on what to do if the sponsoring company is stressed.  

 

 

This latest crisis follows the pandemic, which itself came on the heels of Brexit – all of these already leading to higher inflation, which impacts on both schemes and sponsors. However, this kind of indirect economic exposure is “much more difficult to calibrate”, noted Vivienne Taberer, portfolio manager at Ninety One Asset Management, and it will take some time for these effects to become clear, although markets have been quick to discount as much of it as they can. 

 

The exact fallout from the Ukraine war for western markets will depend on whether the West moves into “phase two”, said Thanos Papasavvas, founder of research boutique ABP Invest. “I believe Putin will do whatever is necessary to ensure he wins,” he said - a ‘win’ likely meaning to stop Ukraine from joining NATO or the European Union. “If we pursue into stage 2 and the trajectory of sanctions continues, it will have a broader impact on risk assets, higher inflation and lower economic growth, leading to a stagflation environment,” he predicted.

 

 

However, even when the Ukraine war ends, there will still be high inflation and continuing geopolitical tensions, Papasavvas argued, because of China’s growing presence on the world stage and potentially a new US president in 2024. 

 

Given this outlook, paying pension benefits could pale into insignificance, yet trustees have to act in members’ interests – so what can they do now?  

 

“It’s about having a robust governance plan in place, trying to understand and working with the sponsor on the impact of particular events, avoiding knee jerk reaction,” said Dickon Best, a trustee director at Ross Trustees. A good risk management process is key, he added. 

 

Fairs advised trustees to keep an eye on regulators’ websites, as the situation is fluid: “We’re in a world where things can change very quickly. We and the [Financial Conduct Authority] are working with government on how that position is changing.”