Since dawn broke on the morning of 24 June I have been asked the same question repeatedly: what does Brexit mean for British pensions? One answer would be that I am not Nostradamus. Certainly, the future by definition is unknown. However, discerning the lineages of the short-term effects and the long-term parameters in which the consequences of Brexit will proceed is possible.
The first thing to say is that UK pension funds have a lower exposure to UK markets, especially equities, than often appreciated. Portfolios are generally diversified, with much less of a home market bias. To the extent UK pension scheme investment is now a truly global affair, then Brexit’s importance diminishes.
In the short term, schemes with overseas assets unhedged have generally benefited from sterling’s decline, although how widespread such an approach is remains unclear as fiduciaries have different hedging philosophies. Meanwhile, post-Brexit gains in government bonds (lowering yields) work both ways, making it more expensive to buy a pension at retirement but increasing the value of the pot of those lucky enough to be de-risking towards annuities in the glide path to retirement.
In the long term, if China engenders a soft landing, emerging markets recover consequently and the US is earlier in its cycle than history suggests, then overseas exposure could deliver real returns. Domestically, there might also be a boost to UK exports as our goods and services become cheaper to sell abroad, even if the correlation historically between devaluation and export growth is attenuated.
However, this is not to underestimate the size of the political-economic shock. Only the series of crises that converged during the year 1974 come close to Brexit in Britain’s postwar history.
Then, a loss of confidence among policymakers in Keynesian economic management as the means to full employment and controlled inflation, the collapse of Northern Irish devolution in the midst of sectarian conflict, the three-day week accompanying the miners challenge to government authority, and a respectable vessel for anti (Afro-Caribbean and South Asian) immigration in the form of (Enoch) Powellism, together placed great strain on the system.
But 1974 was a convergence of domestic crises the UK state proved capable of containing and resolving, not least via Thatcherism. Brexit is much more significant and far-reaching in its implications.
Just look at the way Westminster’s two major parties of state have been convulsed by change since the fateful morning of Friday 24 June. Look too at the (further) instability imported into the UK’s constitutional arrangements by Brexit. It is no coincidence that new Prime Minister Theresa May’s first official visit was to Edinburgh, and soon after to Belfast, with nationalist movements emboldened in each nation by their “remain” majorities.
Beyond the territorial politics, Brexit has brought to the boil a long simmering tension between the UK’s economic and political imperatives. The importance to the UK economy of the single European market in goods and services is clear. Economists do not agree about much, so the extent of their unanimity about the benefits of free trade is striking.
The LSE’s Centre for Economic Performance is typical, calculating that loss of the benefits of comparative advantage and competitive pressures via the single market have a direct cost amounting to 1.37 per cent to 2.92 per cent of UK living standards. Less trade means lower productivity, and weak productivity growth has been the UK’s great macro weakness for half a century (the much reviled French economy’s productivity is 30 per cent higher).
The story from empirical studies is more chastening still. Including the wider benefits of economic “openness” (especially technological diffusion via labour mobility and greater trade with migrants’ countries of origin), generates a much greater economic impact, reducing living standards by somewhere in the range of 6 per cent to 9.5 per cent in the long term, according to the same LSE team.
Immigration’s contribution to economic activity and the public finances in the last decade is clear in revenue as well as GDP terms: the average central and European migrant has provided on average an annual contribution to the taxman £25,000 greater than the average Briton in the decade from 2001.
At this point, economics and politics diverge. “Taking back control” is predicated on nation-state sovereignty defined in terms of the UK making its own laws, controlling its borders and reducing immigration. Anxiety about immigration has been rising rapidly up the list of voter priorities since the UK opened its doors without reservation to migrants from the central and Eastern European accession states in 2004.
Governments since have tried (and failed) to bring down immigration levels. The politics of Brexit demands this Government do so. But the free movement of goods and services on which are built the benefits of trade is only possible on a frictionless basis if accompanied by the free movement of people. It is the Prime Minister’s job to square this circle. It will not only be pension funds watching closely.
Gregg McClymont is head of retirement savings at Aberdeen Asset Management