Brexit and PensionsPosted on: 01 June 2016 by 50connect editorial
What is the likely impact of Brexit on pensions and savings? Tom McPhail explains.
Tom McPhail, Head of Retirement Policy at Hargreaves Lansdowne, cuts through the political bluster andscaremongering of the Remain and Leave campaigns to explain the likely consequences for the savings and pensions of ordinary Britons if the EU Referendum result take the UK out of the EU.
“Given the very high levels of uncertainty around the long term economic consequences of a Leave vote, it is probably ambitious to attempt a forecast of eventual outcomes, says Tom McPhail. "However we do anticipate a period of market instability and volatility in the event of a Leave vote, which could have a short term impact on UK pensions. For investors faced with making short term decisions therefore, the consequences could be good or bad, depending on your circumstances. For longer term investors, there is probably nothing to be gained by acting in haste.”
“From a regulatory and legislative perspective, we do not anticipate any significant immediate effects of a Leave vote.”
A leave vote is likely to lead to a period of short-term market turbulence. We could see a fall in Sterling (this appears to be priced in to a limited extent already), and a rise in Gilt yields. A case can be made for either a rise in bank base rate, in response to a fall in the pound, or indeed further quantitative easing in response to a slowing economy.
Rising Gilt and bond yields, especially if accompanied by higher short term interest rates would feed through into higher annuity rates. This is because the insurance companies selling annuities would be able to generate a higher income from the underlying investments into which they invest annuitants’ capital.
Pension fund assets
The short-term consequences of a leave vote are almost certainly going to involve some market volatility and a fall in asset prices would certainly not come as a surprise. For any investor approaching retirement therefore, any possible gains from an increase in annuity rates could very well be offset by a drop in investment fund values.
Final salary scheme deficits
The same dynamics could apply to final salary pension schemes. On the one hand a rise in Gilt yields could lead to reduction in schemes’ liabilities, however they may also find any gains being offset by falling values of scheme assets.
State pension increases for non-resident UK pensioners
The UK currently has an arrangement with countries across the European Economic Area, including non-EU countries such as Norway, as well as Gibraltar and Switzerland. We also have reciprocal arrangements with around 16 other countries. These reciprocal arrangements mean that UK pensioners who have retired abroad benefit from inflation proofing to their state pension incomes.
It is in theory possible that our arrangements with EU countries would come under pressure in the event of a leave vote, however given the intricate levels of economic and social interdependence between the UK and EU member states, it may not be in anyone’s interests to unwind current arrangements in the short term.
Other possible consequences
A leave vote would release the UK from some European regulatory restraints. This could lead to NEST having greater scope to play the role of a state-sponsored pension provider, without falling foul of European state aid constraints.
The UK might have the option (if desired) of unwinding the imposition of unisex annuity rates, introduced in December 2012 at the behest of the EU Gender Directive.
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