A U.K. exit from the European Union is expected to provide a “slight boost” to pension funds in the short term, but the impact over the longer term is harder to gauge, said a new report by the Society of Pension Professionals.
The SPP, which represents providers of advice and services to occupational pension funds and their sponsors, warned in a report published Tuesday that a so-called Brexit “may represent one of the biggest threats or biggest opportunities facing U.K. pensions in a generation. No one in the industry can afford to be complacent: The numbers are just too big.”
The SPP considered the effects of a Brexit on the U.K.’s credit rating, the currency and on long-dated index-linked gilts.
The loosening of unwanted regulations in the event of a Brexit could be positive for the U.K.’s credit rating; but on the other hand it could take a hit since markets could view a Brexit as putting distance between the U.K. and its main trade partner, Europe, the report said.
“Despite being hard to assess today, the risk over the longer term should be a watch point for all pension funds that seek to invest over many decades,” the report said.
Regarding the pound sterling, the report said the currency might weaken in the short term, but it would benefit most pension funds that have not fully hedged their non-domestic asset exposure.
For long-dated index-linked gilts, in the event of a Brexit increasing market uncertainty and raising questions over the U.K.’s long-term financial strength, yields would likely rise a little. This would benefit most pension funds, since they have not fully hedged liabilities, the report said.
The report said the potential freeing of U.K. pension funds from EU legislation and regulation might be a benefit, but it warned that if the U.K. were to join the European Economic Area, it might still be required to adopt EU pensions legislation. The EEA extends the EU’s internal market to certain countries in the region but outside of the EU itself.The SPP also warned that the U.K. would still have to face EU policy under a Brexit scenario. Under a model similar to Norway or Switzerland’s agreements with the EU, the U.K. “would lose influence on policy while still being subject to it.” An “out” vote and the uncertainty of how the U.K. would proceed in terms of a relationship with the EU “could seriously affect gilt yields.”
The report is available on the SPP’s website.