How will Trump’s tariffs affect Defined Benefit pension schemes?
4 February 2025
President Trump has wasted no time in hitting leading and neighbouring economies with punishingly high tariffs. As the world braces itself for a trade war, Andrew Overend, Partner and Head of Investment Services, discusses the potential impact on Defined Benefit (DB) schemes.
It’s hard to work out, at this early stage, how the US’s new enthusiasm for tariffs might affect UK DB scheme investments.
If other countries respond in kind and trade barriers become widespread, it’s easy to imagine adverse consequences for global stock markets.
That said, with schemes’ modest exposure to equities, this may not be too worrying right now.
And at this point, we can’t rule out that Trump’s underlying intention is to threaten the introduction of tariffs – and the expansion of existing ones – to force concessions from the US’s trading partners.
If that turns out to be the case, then the deployment of tariffs might prove to be short-lived. It may even result in positive stock market movements, particularly given Trump’s characteristic pro-business stance.
In any case, given that equities are a long-term investment, knee-jerk reactions from investors to these developments strikes us as unnecessary.
Most commentators believe that tariffs will have an inflationary impact. However, to the extent that this affects the UK, the impact may actually turn out to be beneficial. Schemes’ exposure to rising inflation tends to be limited by their benefit caps. And if the market response is to raise interest rates (resulting in higher gilt yields) then liability values might go down.
Whether gilt yields will increase is open to debate. Prior to this weekend’s developments in the US, the Bank of England was expected to cut the UK base rate later this week. That outcome now looks uncertain, leaving the future direction of UK interest rates and gilt yields very much up in the air.
What is true, however, is that gilt yields are much higher than they have been for many years – with most schemes recording much improved funding positions as a result.
We recommend that any trustees who haven’t recently considered whether to increase their liability hedging may wish to do so. Schemes that are in a reasonably good shape today, may have cause for regret if interest rates do fall again.