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The Brexit and pensions fallout of a hung parliament

The wider implications for advisers and financial services

Brexit is set to take centre stage with pension policy reform pushed to the sidelines in the wake of the UK’s new political era.

As Money Marketing went to press this week, talks were continuing between the Conservatives and Northern Ireland’s Democratic Unionist Party, whose 10 seats would be just enough to form a Government.

After a brief campaign, the shock result saw Labour gain 30 seats and the Conservatives lose 12, despite Prime Minister Theresa May calling the snap election with the aim of getting a stronger majority for her party and giving her a mandate to push ahead with a hard Brexit.

Instead, the expected deal between the DUP and the Conservatives has led to speculation a “softer” Brexit deal could be on the horizon.

Leaving the European Union is undoubtedly at the top of Westminster’s priority list. But what are the wider election implications for advisers and financial services?

The pensions sticking point

The Conservatives and the DUP have differing stances on several areas of pension policy, including the state pension triple lock. In the Conservative manifesto, the party proposed watering down the triple lock to a “double lock” in 2020, which would see the state pension increase each year by either inflation or average earnings, whichever is higher.

However, the DUP pledged to keep the triple lock, which has led to commentators predicting it will not be scrapped.

Altus consulting senior consultant Jon Dean says there could be an agreement to tackle the triple lock after progress has been made on the Government’s more pressing issues, such as Brexit. He says: “As expensive as the triple lock is in the longer term and as much as it could save the Treasury billions, it is probably a less urgent thing to address than getting a good deal for the UK.”

Royal London policy director and former pensions minister Steve Webb adds it will be difficult for the Conservatives to push any controversial reforms through parliament.

He says: “Things like scrapping the triple lock, means testing the winter fuel payment and asking people to pay more for their social care, all of those things will be very difficult and there is nothing in it for the DUP to go along with.”

Social care reform represented a thorn in the side of the Tory campaign as May came under fire for a U-turn on the party’s manifesto pledge, after belatedly announcing there would be a cap on social care costs.

Things like scrapping the triple lock, means testing the winter fuel payment and asking people to pay more for their social care, all of those things will be very difficult and there is nothing in it for the DUP to go along with.

Webb predicts the Government will publish a green paper on social care.

He says: “It will be a very consultative ‘here are some options’ document. They will want to pretend they haven’t backed down but it will be a watered-down document.”

Dean suggests the Government’s Brexit focus will mean there is less of an emphasis on other pension policy areas that are usually subject to Government tinkering.

He says: “Pension tax relief may be less under threat. We have got no commitment from the Conservatives not to increase personal taxation rates.

“In Northern Ireland the DUP wants to devolve power in Stormont to reduce corporation tax so they can compete with the Republic of Ireland. The Conservatives and the DUP are quite well-aligned on taxation policy.”

Webb adds a period of stability on pension reform is a good thing.

But he says: “The worry would be if the lack of a strong Government means we are not going to see big reforms and that we will just see tinkering. Take tax relief, we probably won’t see a big structural upheaval but the Government is still short of cash so maybe we will see cutting the annual allowance and more cuts in the lifetime allowance.

“Governments that can’t do big things have a knack of doing small things and that would be a worry.”

Quiet on the client front

Following the outcome of the Brexit referendum, advisers told Money Marketing they received numerous calls from clients about their portfolios in the wake of market volatility.

But this did not seem to be the case following last week’s general election. Yellowtail Financial Planning managing director Dennis Hall and Investment Quorum chief executive Lee Robertson both saw no increase in client queries.

Hall says: “What I saw with Brexit and the Trump vote was there were some clients trying to game the markets. If they had new money coming in, they were asking what was the best way of timing their investment or if they should focus on exploiting what might happen with the dollar or sterling. This time, nobody wanted to play the game.”

Robertson says more worrying for investors is inflation appears to be creeping back in relatively quickly.

He says: “While this looks kind of catastrophic at the moment, it is just background mood music. Good advisers always talk to their clients about sticking to the plan, continuing to invest and not overacting to political mood music.”

The markets did not experience a repeat of the turmoil following the Brexit vote. On the morning of 9 June, the FTSE rose 1.3 per cent minutes after opening on news the UK was facing a hung parliament and sterling saw initial drops of 2 per cent against the dollar overnight before regaining ground.

Minsterial shuffle

The election took the scalps of two Treasury ministers, with former chief secretary to the Treasury Jane Ellison and former economic secretary Simon Kirby losing their seats.

Former work and pensions secretary Damian Green was promoted to first secretary of state, with former chief secretary to the Treasury David Gauke named as his replacement.

Webb calls Gauke “knowledgeable” but says his new role is not without its difficulties.

He says: “The problem the Department for Work and Pensions secretary has is they have to do a lot of work that isn’t pensions. It is hard to be focused on pensions in that job because the other things tend to grab you on a day-to-day basis. He will be more involved in pensions than his three predecessors were.”

Iain-Anderson-MS-CUTOUT-250x255.jpgExpert view
Iain Anderson is executive chairman at Cicero Group

What a mess. There are no other words for it. An election that was supposed to produce a strong and stable Government has produced a weak and wobbly one.

After weeks of campaigning all the pundits and most of the pollsters got it wrong, although some called it just right. The “yoof” vote turned up and confounded all expectations. And they voted in huge numbers to deny Theresa May her majority.

Who knows what happens next. The Queen’s Speech may be delayed as talks progress between the Conservatives and the DUP.

Whatever happens it is not going to be a full coalition deal – the Tories really do not want to retoxify their brand with many of the DUP’s socially conservative views.

But what does this mean for advisers?

First up, Philip Hammond stays as Chancellor. The PM was expected to move or sack him but her weakness has meant he stays put. That means the FCA and the Prudential Regulation Authority know who they are dealing with. His
desire for a soft Brexit also keeps most providers happy.

The new Work and Pensions secretary David Gauke is another pragmatist. He knows the long debate about pensions reform having been a Treasury minister since 2010. His first major task will be to deal with the DUP demand to keep the triple lock.

Further pensions reform may be just too difficult to do with no Commons majority.

The big question is now about the social care reforms. The disastrous manifesto U-turn that put paid to those chances of a Tory victory. Are they now stone dead?

That is the real tragedy of this election. At a time when the UK needs leadership and bold ideas to encourage better financial provision, we may get neither for years to come.

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  1. What we have is what I had hoped for – a hog tied administration. As near to stasis as you can get. This will mean a far less severe Brexit and hopefully much less Government.

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