The impact of Sterling on pensions becomes more evident as the Brexit situation unfolds. Currency markets have been turbulent since the UK voted to leave the EU. Sterling fell by around 18% against the Euro and US$ in the immediate aftermath; pundits have been having a field day ever since. Some say Sterling is doomed and will fall further if Brexit ends up being the ‘hard’ version. Others claim it will recover once the dust has settled and that the UK will become a stronger trading nation outside the EU. Which is it to be? The truth is that no one can actually predict what is going to happen. Let’s have a look at the factors which might affect the future value of Sterling.
There could be tough times ahead
The value of a currency is linked to the economic performance of a country. Supporters of Brexit will claim that the weak Pound stimulates exports, thus giving the economy a boost when times are tough. This is true to some extent. However, the global market can be a complicated beast. Anti-Brexit commentators would point out that the UK is a net importer from the EU and that supply chains are dependent on products made up of different parts, sourced from many countries. As such, a car might be manufactured in the UK, but some of the constituent parts may be imported from other EU countries. These parts are priced and paid for in Euros which means that UK car manufacturers must pay more for them. This cancels out some of the advantages of a weak Pound. Manufacturers would then decide whether to absorb the cost themselves or pass it on to the consumer in the form of higher prices.
By the same token, as the UK imports more goods from the rest of the EU than it exports, the balance of trade becomes disadvantageous to UK consumers as they pay more for the same things due to currency movements. We’ve witnessed this recently with the rise in petrol prices, as oil is (mainly) sold in US$. There are numerous similar examples with Euro/Sterling trade.
We are also now seeing evidence of UK-based workers from other EU countries opting for employment in Eurozone countries as a result of their wages falling in Euro terms. This might be seen as desirable by the pro-Brexit camp, but with record employment rates in the UK, it is not clear who will replace these workers. Fruit and vegetables will still need to be picked; building companies that are highly reliant on EU workers could suffer. This is also a major issue for the NHS, of course.
Everything will turn out fine.
The softer the Brexit, the more likely it is that Sterling will stabalise or increase in relative value. The recently mooted ‘transitional period’ whereby the UK leaves the EU in a 2-5 year period after March 2019 would make it easier for businesses that rely on migrant workers to ease into the new post-EU environment. Sterling will gradually strengthen and, if a sensible immigration policy is agreed, workers will come back to the UK. Similarly, migrants from non-EU countries who aren’t as concerned about the strength of Sterling could fill the void.
In the longer-term, the new trade deals championed by the current government will eventually increase the size of the UK economy. GDP growth should be higher than it would have been had the UK remained in the EU. There are problems with this assumption though. In the first instance, trade deals can take many years to conclude; the recent suggestion of ‘cutting and pasting’ current EU deals is perhaps wishful thinking. The EU would have to agree to this approach. They are highly unlikely to wave through trade deals with other countries that are the same or better than those that the UK currently has. Furthermore, non-EU countries are unlikely to risk their EU trade deal where they have access to 450 million consumers for a better one with the UK’s 65 million.
The impact of Sterling on pensions and investments
Sterling’s impact on pensions is a key issue for those of us living and working in the EU. Many individual with private pensions or SIPPs have suffered reductions in income due to the falling Pound. Where a retiree might have received €140 for every £100 in August 2015, they are now lucky to get more than €110.
Three solutions come to mind:
1) If you have retired, or are about to retire in an EU country, you can bite the bullet and ‘euro-ise’ your financial affairs. Sterling may strengthen or weaken in future, but you have protected your assets from currency fluctuations. You may consider moving your UK pension to a SIPP or QROPS in order to facilitate this strategy.
2) Hope Sterling will strengthen post-Brexit for the reasons outlined above.
3) Create a natural ‘hedge’ by adopting a strategy across several currency denominations. You could perhaps hold a third of your assets in each of Sterling, Euros and US Dollars.
Everyone’s personal preference will depend on factors such as general feelings about Brexit, where they spend money (maybe someone has a mix of financial commitments in the UK and EU), whether they are permanent EU residents or will eventually return to the UK. There are numerous issues for consideration; everyone’s individual circumstances are different and can change.
Something I would advise against is allowing personal political views to direct your currency strategy. Money doesn’t care, and markets work on emotionless, cold, hard facts. As advisers, this is how we look at markets. No one wants to hear my political opinion, what they want is good quality information, backed up by a realistic view of now and the future.
Not doing anything will rarely be the right way forward. I would urge everyone to take a long, hard look at your currency strategy and talk with your adviser.