This article was originally commissioned for the March 2018 edition of the Investment Life & Pensions Moneyfacts Magazine. Tom Murray argues that a slowdown of new regulation, and the stability that this brings to long-term planning, could be the real Brexit dividend for pensions.
There is a lot of noise in the media at the moment about the so-called “Brexit dividend”. Leave supporters claim that there will be a huge financial windfall from leaving the EU, in line with the infamous claim of a possible extra £350 million per week for the NHS. Although this was widely discredited in the months since the referendum, it has been raised again by the Foreign Secretary, who now reckons it will be even higher.
Whatever about the dividend for the public finances, the constant use of the phrase had me wondering whether the whole Brexit process might hold any dividend for those who are saving for their retirement and whether there is any particular aspect that might provide gains for long-term savers.
It seems unlikely that investments, long and short term, will be unaffected. Brexit has dominated all political news since the referendum 20 months ago, though you would be forgiven for thinking that it was much longer ago than that. For most of that time, the focus of the government and the media has been on the intricacies of phase one, where the exit bill was discussed along with the rights of citizens and the incredible complexity that is the Irish Border. These issues dominated the news agenda, whilst the more financially relevant areas of future economic relationships were left on the back burner.
Since the putative agreement in these three areas was signed off in December, the key economic issues are coming to the fore as the implementation period /transition period, according to taste and the future economic relationship are up for discussion. This is where one would expect the market to be focused and therefore the most potential gains for investors to be up for grabs. However, given the inability of the Government to come up with a unified direction for the country, it does not seem that there will be any clarity of the final position anytime soon, which makes it impossible to judge the effect of Brexit on investments and to exploit / hedge against those effects if possible.
PARALYSIS BUT NOT BY ANALYSIS
The government is so caught up in the masterminding of the Brexit process that very little else is being carried out. This is a government that is so overwhelmed of the process of exiting the European Union, the scale of which appears to have caught everyone by surprise, that they have zero time to focus on domestic policy. Any domestic initiatives seem completely reactive to events rather than following a clear long-term strategy. Nowhere was this more visible than in the Queen’s speech, which delineated the lowest ambition in terms of a legislative programme that has been seen for many years.
Then, in November, we had the Autumn Budget, which was also noteworthy for the paucity of its ambition. For those in the pensions and investment world, it came as a quite a shock to get so little mention after a number of years of rapid change in the sector.
SECURITY PROMOTES SECURITIES
Perhaps this should not have come as a surprise. The years of rapid change in pensions policy were marked by the security of tenure of the pensions minister. Steve Webb was the only person to hold the role during the coalition’s 5 years in office, and stability in the role was marked by a large amount of change in the policy, as new ideas were tested and brought to fruition.
In contrast, in the three years since Cameron won a Tory majority, there have been three people responsible for pension – Baroness Altmann, Richard Harrington, and now Guy Opperman – and the turbulence on the personnel side has led to a certain stability on the regulatory side with no new major initiatives emerging.
It seems that there is an inverse relationship between the stability of the ministry and the stability of the strategy pursued, though it might be more correct to say that when the minister is being changed too frequently, the ability of the department to bring any ideas to completion is completely undermined.
Of course, the fact that the role was changed during that time was also not helpful, with the pensions area demoted from having a full minister to having a secretary of state and then having half a secretary of state, as Guy Opperman was also given responsibility for financial inclusion. They may be related areas, but it still dilutes his focus on pensions.
You would normally expect a lot of announcements with a lot of ministers. It is inevitable when people take a new senior role that they feel they have to change something. Few people have the courage to take over a ministry, or indeed a company, and announce that everything is fine and the best thing for everyone would be to keep going along exactly as they are, even if it clearly is the case. It is a sign of the paralysis in this Government that this hasn’t been the case and no major or even minor initiatives have been forthcoming.
In the wider scheme of things, Brexit has had one primary impact – the driving down of the value of the pound sterling. Clearly this has had a positive impact on the stock market and therefore on the valuations of funds in general. The result is a positive impact on the value of pension funds with the resulting encouragement for saving in the short to medium term.
There is also a level of buoyancy in the stock market since the exaggerated fears of crashing markets floated during the referendum campaign have not come to pass. Both effects are having a positive influence on the investment funds and thereby the pensions savings of the public, but it is not possible, in the absence of any clear strategy, to assume that this will be maintained post Brexit day. Therefore, it is hard to take either of these as being a Brexit dividend for long-term savers.
INFIGHTING DISRUPTS PLANNING
The biggest issue holding back longer-term investment strategies is the complete uncertainty as to what strategy the Government is pursuing. Surprisingly, for a country that is embarking on the biggest political change in a generation, there has been no clear identification of the end destination desired. It appears that the Government is so caught up in trying to control the day-to-day news cycle, primarily to ensure that the Conservative Party doesn’t split down the middle, that it is unable to raise its gaze to look into the future. As a result, there is total confusion in the markets as well as the general public about the strategy that is being pursued and ultimately where the country is likely to end up.
The weakness of the Prime Minister after the last election is not helpful. Dependent upon support from another party and needing to keep all shades of opinion within her party on board, she is not strong enough to face down either side of the division in her cabinet. As a result of relentlessly having to defend her position and fend off possible overthrow, she does not have the luxury of defining a position and holding to it.
This opens up space for the disaffected or the ambitious within her party to stir up trouble. Each week dawns with a new Brexit-related announcement or article in the newspaper from a senior cabinet member, which is more about positioning the author for higher office rather than actually advancing the exiting process or articulating a clear vision of the UK’s destination. In fact, it is noticeable that the major players are more coherently identified by the positions they are against than by what they are for.
The result is confusing messages coming from the media to the general public. Most of these messages are more concerned about ensuring that someone else will be to blame if it all goes wrong rather than clearly stating what should be done. Interestingly, the same can be said of the opposition, whose stance is simply not clear either. As a result, we are now eighteen months since the referendum and, with barely 13 months to go before the country formally ceases to be part of the union, nobody has a clear idea of what the next stage will look like.
THE REAL DIVIDEND FOR PENSIONS
Thus, despite all the talk about a dividend, it is difficult to see how this current confusion is good for investment and how the lack of an objective destination assists people in making long-term investment decisions. There is clearly no sign of a dividend for investors coming out of the mayhem that is currently engulfing parliament and government.
There is however, one good side to the stasis that has been induced in the government by the enormity of the Brexit undertaking. That is the slowdown of new regulation and new initiatives brings a level of stability to long term planning that just hasn’t been there before. A government which is dealing with such a large amount of change that spreads across all sectors of society clearly can’t focus on other issues and as a result we can look forward to a period of relative stability in the regulatory environment.
Even things that were seen as a given in recent years, such as the looming changes to the taxation relief given to pension contributions, now appear to be far too complex to be implemented alongside the chaotic mess that is Brexit. It seems highly probable, if not actually certain, that investors can plan with full confidence that the regulatory environment is not about to be upended on them. This is a luxury that is almost unprecedented in recent times and is not to be sniffed at.
It seems odd to say that the inability of the Government to get its act together and produce a strategy could turn out to be the biggest dividend that long-term savers get out of the enormity that is Brexit, but beggars can’t be choosers and any benefit is better than none. Whatever Brexit may bring in terms of opportunities for investment and benefits for the economy, and no one on any side seems to have any clear idea of what these might be, those of us in the life and pensions industry can at least take solace in the fact that we have a few clear years when we will not be grappling with new regulations or legislative approaches and that the number of initiatives launched by the government are likely to be minimal. Let’s just be thankful for small mercies and see what emerges if indeed we ever get to the end of this process.