Richard Smith, Head of Employer Services, Spence said: “The EU Referendum represents a once in a generation chance for the UK to shape its relationship with the EU and also the direction of future legislation with wide ranging impacts on all of our lives. Pensions are not immune from this - the upcoming EU referendum could significantly affect investment markets and pension schemes both in the UK and in Europe.
“The impact will be felt regardless of the outcome - pre-vote uncertainty in itself over the result will inevitably cause a lot of volatility in the markets. In the event of an exit vote, the aftermath would likely continue in the short to medium term as the markets adjust and the country gets to grip with the impact of having to renegotiate freedoms of movement and trade. While we may not see any immediate changes to pensions, it would certainly give more freedom for the UK to make changes in the future.”
Spence predicts that the four key aspects of pensions that will be impacted are:
• Scheme Funding – With an impending referendum, economists expect gilt yields to become more volatile due to concerns over the stability of the EU economy. In the event of an exit vote, returns on UK equities would lag behind their EU & Global peers. In addition, the value of sterling could fall leading to increased short term inflation. This would be good or bad news for a scheme depending on where it was invested. Uncertainty may also provide opportunities that pension schemes can take advantage of through careful monitoring of their investments and effective governance.
• Money Purchase Schemes - Members of money purchase schemes may find that the value of their pot is volatile as the EU Referendum approaches. Those approaching retirement will also be exposed to the risk of volatile gilt prices if they wish to purchase an annuity on retirement. However, if gilt yields increase as they are expected to in the event of a Brexit, then such members may subsequently be able to purchase more income with their pension pots. This is an area where it will be key for DC members to take advice. Instability in annuity rates caused by volatile gilt yields may provide a further boost to drawdown products until markets settle down.
• Sponsor Covenant - Trustees of Schemes whose sponsors are heavily exposed to the EU either through exports, or through subsidies will need to take a lot of care around the time of the referendum and also following an exit vote. Even the threat of ‘Brexit’ may cause EU businesses to look to find suppliers within the EU to reduce their risk of a UK exit. The effect of this is likely to be offset slightly by the predicted fall in the value of Sterling should the UK leave the EU. If this were to happen, it would make UK exports cheaper for EU countries and with the right agreements in place may help to improve trade. Conversely, net importers from the EU may see a relatively more expensive Euro eat into their profits.
• Cross Border Schemes - One of the more obvious areas where an exit from the EU would have an impact is on cross border schemes between the UK and the EU. Currently under EU legislation there are very stringent requirements that cross border schemes must be fully funded at all times. A vote to leave the EU could make the UK an attractive place for any multinational with sites in the EU and the UK to base their pension scheme.
Richard Smith added: “In recent years, we have seen constant change in the pensions landscape, and with the upcoming EU referendum the only thing we can be sure of is that these changes are set to continue regardless of whether we vote to leave or remain in the EU.”
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