Cardano's Emma Adair lays out the possibilities of the upcoming election and what this may mean for UK pensions.
It's the most uncertain UK election in a generation and it may well be all change at the DWP with a new Pensions Minister replacing Steve Webb, depending on which way the voting goes.
But what are the broader implications for the pensions industry and what are the uncertainties that pensions schemes need to consider?
Let's look at some of the scenarios that could take place:
In the offing
If the Conservatives hold onto power then we have the prospect of an in-out EU referendum. It is not yet clear what the British public will think about this, which points to a period of uncertainty.
The prospect of an EU exit would strike fear into businesses up and down the country and it will likely knock investor confidence in the UK. Think of the nervousness caused by the Scottish independence referendum late last year, only worse.
Push the boat out.
If Labour were given the keys to Downing Street then expect a wave of anti-business measures. It is likely that UK debt will be reduced at a slower pace and new regulations on financial and energy markets may even be introduced. While the UK may benefit from a slower pace of cuts in the shorter term, these new targeted regulations may impact longer term growth.
All at sea
There are also dangers to a coalition of two or more parties or even a minority government. Such a government would be inherently unstable, making the coalition talks between the Conservatives and Liberal Democrats in 2010 seem like a doddle compared to what may be required this time around. It is also likely that these talks would drag on for some time.
On top of this, if Labour formed a coalition with the SNP, then the prospect that the UK might break up comes back into the mix.
A shot across the bows.
The general election could trigger a serious period of uncertainty for the stock market, and prolonged weakness for the British Pound. This will tend to have a larger impact on UK pension schemes given their inherent bias towards these markets.
The Bank of England might be forced to keep interest rates lower for longer. This is especially true if the increased uncertainty causes knock on impacts to the UK economy.
Longer term UK gilts yields could also rise sharply as investors perceive UK debt to be riskier than before.
What should be done to manage these risks?
It makes sense that UK pension schemes try to limit their exposures to these risks. However, lower levels of liability hedging may prove positive if longer term interest rates are driven higher. Not being fully hedged against currency moves may also be beneficial if the British Pound weakens.
For those who have delegated their investment decisions to us, we have made sure that they are largely protected from the uncertainty of the election, through the highly diverse investment strategy we follow.
With UK politics becoming harder to predict it's time to batten down those hatches and prepare for choppy waters ahead.
Written by Emma Adair, Head of Client Management, Cardano
