Has Article 50 increased the risks to pension savers?

As Steve Webb, director of policy at Royal London observes, there is a clear link between pensions and the economy.

“At the heart of good pensions is a strong economy. With a strong economy there is the tax revenue to pay state pensions, there is the revenue for companies to pay good wages, and there are opportunities for individuals and pension funds to invest their capital and get a good return,” he explains.

“The key question, therefore, is whether Brexit and the triggering of Article 50 has a positive or negative effect on the UK economy.”

Damage to pensions

As discussed earlier in this guide, the shape of the UK’s economy during and towards the end of the negotiations is unknown which makes it hard to measure the direct impact on pensions.

The main impact so far has been the sudden and continuing decline in the value of the pound.

Mr Webb says: “This has given a boost to exporters and, coupled with continued loose monetary policy, has helped to keep the economy going since the referendum.

“However, there are signs that stagnant real incomes and business nervousness about the outcome of the Article 50 negotiations are starting to act as a drag on the economy, and growth has slowed considerably.”

He forecasts: “It seems likely therefore that the economy will weaken and this will damage pensions in the short-term.

“This will be reinforced if interest rates are kept 'lower for longer' as appears likely.”

Much more important, though, is the long-term outlook when it comes to pensions, as those saving for later life will be doing so for another 10, 20, 30 or even 40 years, particularly as the state pension age is set to increase.

In other words, the short-term implications of Brexit should not matter to them.

The one group of people who could be affected by Brexit are UK citizens who have retired to EU countries and are in receipt of the state pension.Tom Selby

Tom Selby, senior analyst at AJ Bell, urges investors and retirement savers not to try and second guess the impact political events such as leaving the EU will have on markets.

“While the UK leaving the EU might increase short-term volatility, pensions are a long-term game and so shouldn’t be overly affected by political turbulence. 

“Indeed, the biggest danger to pensions might be people being put off retirement saving because of the perceived risk associated with Brexit,” he warns.

“It’s also worth remembering that Brexit is just one factor affecting investment conditions in one part of the world. In reality pensions are invested globally and markets are affected by a multitude of factors.”

While Mr Selby does advocate taking a long-term view when it comes to saving for retirement, he points out there is a group of people for whom the future of their pensions is rather more uncertain.

“The one group of people who could be affected by Brexit are UK citizens who have retired to EU countries and are in receipt of the state pension,” he notes. 

“Currently their pensions are up-rated in line with UK policy, and while there is no indication this will be removed it will form part of the early stage negotiations between Brexit secretary David Davis and his EU counterparts.”

Threat of inflation

Uppermost in the minds of those who are nearing or at retirement age will be the sharp rise in inflation, which is likely to eat away at any savings and income.

Inflation hit 2.9 per cent in May, although it surprised many by dropping 0.3 percentage points to 2.6 per cent in June. This still puts it above the Bank of England’s 2 per cent inflation target.

Property bond provider Minerva Lending published research which suggests inflation is eroding savers’ cash accounts by £377 a second.

According to Ross Andrews, director at Minerva Lending, a saver with £5,000 held in the average instant access account will see its value slump £411 in real terms to £4,589 in that time. 

To the extent Brexit has put downward pressure on the pound and gilt yields and upward pressure on inflation it has made life harder for pension funds.Wouter Sturkenboom

Someone with £25,000 would see that sum shrink £2,055 in real terms to £22,945 in the same period.

Wouter Sturkenboom, senior investment strategist at Russell Investments, reasons: “To the extent Brexit has put downward pressure on the pound and gilt yields and upward pressure on inflation it has made life harder for pension funds. Funding ratios have taken a hit. 

“At the same time, international investments that weren’t currency hedged have seen a boost. However, the former clearly outweighs the latter in the short term.”

He suggests in the long term the answer to the question, has the triggering of Article 50 and the ongoing negotiations increased the risks to pension savers, is a difficult one to answer. 

“It will depend to a large extent on the outcome of the negotiations,” Mr Sturkenboom notes.

“Should the UK crash out of the EU it will certainly be a risk because of the negative impact this will likely have on growth.

"If, on the other hand, an exit agreement is reached and a trade deal can be concluded in a transition period the overall impact of Brexit on pensions might turn out to be quite limited.”

eleanor.duncan@ft.com