Chief Strategist: How a ‘Brexit’ may affect your pension plan

To be or not to be a member of the EU? That is the question that the British need to decide on 23 June. The economists are generally worried that the answer will be no, because this will have an adverse effect on the financial markets in which your pension savings are invested. As a pension customer, you do not need to act – unless you have a crystal ball, Henrik Henriksen, Chief Strategist in PFA says.

It may be a bitter afternoon tea for the British if they decide to vote no at the EU membership referendum on 23 June. Great Britain is the world’s fifth largest economy and the home of many large companies. And apart from a financial slap in the face for the Brits, a British exit (Brexit) from the EU may affect the value of your market rate pension savings in PFA Plus.

Below, Henrik Henriksen, Chief Strategist in PFA's investment department, outlines possible scenarios for what may happen if the citizens of Great Britain vote no and leave the EU later this month.

How can the referendum in Great Britain affect the markets and PFA?

“In the investment department, PFA Asset Management, we have drawn out four scenarios,” Henrik Henriksen explains.

• 1. The answer is yes: “In this scenario, the investment markets will breathe a sigh of relief. British shares, European shares and other high-risk assets will increase, just as the British pound will increase its value. This is basically a good thing for the pension savings, as we have a large ratio of European shares in PFA.”

• 2. A happy divorce: “The British answer is no, but besides that, the European collaboration is essentially unchanged. In principle, Great Britain's membership continues for up to two years after the kingdom’s withdrawal from the EU. Therefore, the British will have some time to negotiate a solution about, for instance, cooperation on trade with the EU. This is a scenario that will result in some negative reactions on the markets, but it is not necessarily something that will affect growth in the long term – neither in Great Britain, nor in the rest of Europe. However, this requires that the politicians have the will to find a pragmatic solution. This is the scenario that we believe will happen in the event of a no, as everyone is interested in minimising the costs of a British no.”

• 3. The answer is no (the unfortunate version): “The British and the EU will not budge, but the EU and eurozone cooperation will endure with a few creaks in the joints. This will mean a larger degree of insecurity in the investment markets and result in a lower growth in the British economy.”

• 4. The answer is no (the very unfortunate version): “The worst case scenario is that other countries will follow Great Britain out of the EU, resulting in a break-up of the European collaboration and the euro currency. This is a development that would happen over a longer period of time, and we assess that this is the least likely scenario. It is difficult to predict how negatively the markets will react, but it will be a mess, and we will definitely be looking at a significant decline on all types of high-risk investments as well as a substantial downturn for the British economy.”

If you had a crystal ball that could show you the future, and you had a high-risk profile (profile C & D) and you knew that the vote would result in a no, you would, with a short term perspective, want to switch profile. But pension is about long-term savings, and no one knows the result of the referendum

Obviously, we do not know the result of the referendum yet, and the yes and no sides have been neck and neck for a long time. How has PFA been preparing to secure its customers – regardless of the outcome – in the best possible way?
“In terms of investments, we have adapted our portfolio to a British yes. But, if they vote no, we have acquired other investments that will protect us for a while in the event of a substantial plunge in the share markets. However, a profile D and a British no would affect your return negatively.”

Why?
“We have made agreements with the customers that they have a certain investment profile with a certain risk, and we remain within the scope of the promises that we have given our customers concerning their investment profiles. If you had profile D, and we hedged against all the shares, it would for one thing be very expensive, and for another, you would not receive an additional return if the British vote yes to staying in the EU and the shares rise.”

“If you have chosen profile A, and the British vote no at the referendum, the effect on your return will be modest. However, in return for this security, you can look forward to a considerably lower expected future return.”

With the market rate plan, PFA Plus, there are four different investment profiles with different risks. Should you switch to an investment profile with a lower risk before the referendum if you worry about a Brexit?

“If you had a crystal ball that could show you the future, and you had a high-risk profile (profile C & D) and you knew that the vote would result in a no, you would, with a short term perspective, want to switch profile. But pension is about long-term savings, and no one knows the result of the referendum. If you change your investment profile each time there is a challenge, the timing will typically work against you. To sell shares in times of worry and buy them back when seemingly there are no risks and everything is well on the share markets is not profitable, so I would definitely not recommend this.”

Are there any benefits if Great Britain leaves the EU?
“If you establish your market rate pension plan now, or have limited savings, your future payments would be used to buy cheap shares and other assets with a decreased value. But, for the majority, a no will definitely be negative for their pension savings,” Henrik Henriksen explains.