A U.K. exit from the European Union could lead to a 29% drop in the value of U.K. equities held in retirement portfolios by 2018, the U.K. Treasury warned this week.
In one of several analyses published on HM Treasury’s website analyzing the impact of a so-called Brexit on the U.K., the Treasury looked at the impact on retirement plans in two scenarios: a shock scenario, in which a vote to leave causes a recession, spike in inflation and rise in unemployment; and a severe shock scenario, in which the rise in both uncertainty and financial market volatility is about 50% larger than in the shock scenario.
In a severe shock scenario, the value of U.K. equities in retirement plans would fall 29% by the second quarter of 2018. U.K. corporate bonds are forecast to fall 16% over the same period.
For a shock scenario, U.K. equities would fall 20%, and U.K. corporate debt by 10% over the same period.
The analysis, titled “Effects on pensioners from leaving the EU,” also said retirement savings would be eroded in real terms by higher inflation resulting from a Brexit, and savers would earn lower investment returns overall.
“All pension schemes benefit when funds can be invested across a stable, growing economy, to best support people in their retirement years,” said Rain Newton-Smith, economics director at the Confederation of British Industry, in a news release Friday. “Any financial market turmoil caused by a Brexit is likely to have a negative effect on household wealth, the value of funds and damage pensions here at home, especially for those looking to retire within the next few years.”
Ms. Newton-Smith added that the “sheer weight of credible evidence points towards a serious economic shock if the U.K. were to leave the EU, meaning a hit to the value of our private pensions, jobs and prosperity.”
The Treasury’s analysis is available on its website.