Pensions vulnerable to post-Brexit UK recession

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Pensions vulnerable to post-Brexit UK recession

A UK recession in the wake of the EU referendum has been predicted, with experts fearing a knock-on effect on pensions.

In the days following the vote, a domestic recession and the potential for global contagion were pinpointed as the most significant consequences of the Brexit vote.

By July, PricewaterhouseCoopers analysis projected the UK’s real GDP growth slowing to around 1.6 per cent in 2016 and 0.6 per cent in 2017, but gradually recovering thereafter and avoiding a recession.

Ahead of the Bank of England’s inflation report on the state of the UK economy, due out later today (4 August), FTAdviser spoke to a number of pensions professionals to gauge their views on how a sustained dip into negative growth territory could impact retirement savings in the coming months.

Hugo Thorman, chairman of financial services consultancy and software company Altus, said it would depend ultimately on how people are invested.

“Twenty years ago peoples’ foreign equity out of a 60 per cent to 40 per cent portfolio, all the bonds would be UK and only 10 per cent of the 60 would be foreign equity, so in other words you’d be pretty much all invested in the UK.

“Nowadays most mixed asset portfolios are 30 per cent UK, no more than that, and some a lot less than that. Personally, I’m at about 10-15 per cent because I believe in investing in the world pretty heavily.”

He added if the pound falls further - it is currently down 11 per cent on its pre-referendum level - the retention value goes up, because funds are invested in America and emerging economies.

“If you are invested in FTSE, predominantly they get their earnings from abroad, so they keep going up even if they are in the UK. Unfortunately the big impact on pensions would be people’s ability to pay into them.”

Steve Webb, director of policy at pension provider Royal London, said the fundamental point in this area is that good pensions depend on a good economy.

“Whether it is about generating the taxes to pay state pensions, or the company profits needed to pay good wages, employer contributions into pensions or dividends to shareholders, a thriving economy is central to a thriving pension system; so any downturn would be unwelcome,” he said.

“If low or negative growth was accompanied by very low interest rates, this would put a particular squeeze on companies with large legacy defined benefit deficits.”

Mr Webb added the cost of meeting those deficits would rise because of low interest rates, whilst the resources to meet those deficits would be squeezed by the wider economic backdrop.

“Low interest rates would also feed through into even poorer annuity rates, which is also bad news for savers. On the plus side, if borrowers benefited from lower long-term mortgage rates, then they would have more disposable income with which to save, but whether they would choose to do so is less clear.”

David Trenner, technical director for Intelligent Pensions, said even without a recession, defined benefit schemes are under huge pressure because people are living for longer.

“Recession does not help investment returns - and that’s the big problem for personal pensions - slower growth,” he stated.

“At some point with a personal pension you have to turn it into income. If you’ve got £100,000 of cash you may only get £3,000 of income for example. The average person might have to live 30 years to get their money back.”

John Stirling, chartered financial planner at Essex-based Walden Capital, said the real challenge in a recession is that income guarantees become more expensive, while confidence reduces.

“In relation to pensions, this means that annuities become less attractive. If prolonged then savings are likely to be diverted to more accessible choices, as no one wants to lock up money for 30 years they might need tomorrow to feed their family.

“So less money is saved, and it generates less guaranteed income,” he added.

ruth.gillbe@ft.com