The big election risk to pensions


If Europe’s electoral calendar wasn’t already packed enough, Theresa May’s decision to go to the polls has added another event that will impact markets.

The motivations for the early election are obvious. Polls have given the Conservatives a heady 15-20 point lead over Labour during recent months, which could see Mrs May’s narrow sub-20 seat working majority surge above 100, and deliver her a strong personal mandate.

An election now is unlikely to disrupt Brexit negotiations, given the current lull due to the French Presidential elections and as the European Union finalises its collective approach to the talks. Also the next election was scheduled for 2020, which could have proved disruptive during any transitional period the UK agrees with the EU.

The government may also want to capitalise on the economy’s current strength.

The government may also want to capitalise on the economy’s current strength. In the International Monetary Fund’s (IMF) latest World Economic Outlook, released on the same as May’s announcement, it forecast the UK economy would expand by 2% this year, second only to the US in terms of major developed economies.

The rally in sterling suggests investors support the decision and believe the Conservatives will increase their majority. Supposedly this will allow May to adopt a pragmatic approach to Brexit negotiations, when some in her Parliamentary party are urging her to take as tough a stance as possible.

While this conclusion makes sense, the UK referendum and US Presidential election prove that markets do not always get it right and polls can throw up surprises. Whatever the eventual outcome it is inevitable that sentiment will ebb and flow over the course of the election campaign and this will cause the prices of UK assets to do the same.

Much of the debate will relate to Brexit, but from a policy perspective, I hope the new government does not tinker more with pensions.

The UK has the basis of a healthy pension system along the lines envisaged by the World Bank. An essential element of this was a simplification of the current state system introduced by the Coalition government.

The auto-enrolling of every employee into a workplace pension plan – a globally admired policy 15 years in the making – is not yet complete but so far has added seven million new occupational pension scheme members. Auto-escalating contributions is the next step and that is already set down in legislation. The third tier, individual voluntary savings, are tax incentivised via the very popular system of Individual Savings Accounts into which £20,000 per annum can now be tax sheltered.

The biggest danger perhaps is that politicians can’t help themselves – an obvious candidate for upheaval would be further changes to the system of pensions tax relief which incentivises individuals to defer consumption and employers to provide good pensions. That area will bear watching in a new government.

More obviously, it is likely that a returned Conservative government will end the triple lock by which the state pension is uprated by the highest of prices, earnings, or 2.5%. Pensioners are now on average better off than the population as a whole and of course over the long term the policy is very expensive to maintain.

The UK election came as a surprise to many and will be big news for the next seven weeks. But I suspect that the myriad of other factors facing the world economy – US interest rate hikes, the likelihood or otherwise of a US fiscal stimulus, the other elections coming up in Europe this year, and geopolitical rumblings, to mention a few – will have more bearing on financial markets this year and beyond.

Investment managers can’t control the outcome of any of these events. They’re better off spending their time on what they can influence: focus on meaningful long-term fundamentals and look beyond fickle intra-day market movements.

Let’s just hope that our pensions system is not hurt in the meantime.


The article above was previously published on the ‘Thinking Aloud’ blog on 26th April 2017