Treasury ‘severe shock’ Brexit warning for pensions

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Pensioners will be worse off if the UK votes to leave the EU, the Chancellor has said, with both state pension and DC arrangements degraded under a Brexit.

Treasury figures predict projected increases to inflation following a Brexit would erode the spending power of state pension, which would still increase in line with prices, but would not benefit from a real terms increase under the triple lock if inflation was higher than 2.5 per cent.

The Treasury has set out two scenarios – the ‘shock’ scenario and the ‘severe shock’ scenario – both of which see a recession, higher inflation and falls in asset prices.

This would cost pensioners £137 a year by 2017/18 in state pension under the shock scenario, and £142 under the severe scenario.

The Treasury analysis says that at the time the 2017-18 rate is set, inflation would rise from 0.6 per ceny, projected in the OBR March 2016 forecast, to 2.2 per cent in the shock scenario and 2.6 per cent in the severe shock scenario.
A DC pot of £60,000 would lose £1,900 in real terms on account of the inflation increase, under the Treasury’s shock projection, while a 50-year-old with a pot of £20,000 who is contributing 8 per cent of earnings between now and 2030 would be between £223 and £335 a year worse off in retirement.

The Treasury says a long-term fall in incomes and profits would mean future pensioners were able to save less for their retirement and would see lower investment returns.

Chancellor George Osborne said: “Much of the [Brexit] debate so far has focused on the potential economic fallout of a vote for Leave for those now in work, in terms of the impact on their jobs.

“But it’s important that pensioners understand what’s at stake for them too on 23 June.

“Pensioners who have worked hard all their lives deserve dignity, security and certainty in retirement. That’s what we all hope for and what any responsible government should seek to provide.”

Hargreaves Lansdown comment on the Treasury publication on “The Effects on pensioners from leaving the EU”

Hargreaves Lansdown head of retirement policy Tom McPhail says: “The Treasury paints a fairly apocalyptic picture of widespread reductions in retirement incomes. The key assumptions they make are of higher inflation and lower economic growth; both of these assumptions may be open to challenge by the Leave campaign. Change the underlying assumptions and you change the outcomes.”

Higher inflation could negate the above inflationary increases enjoyed from state pension recipients, thanks to the 2.5 per cent increase element of the triple lock. However it is important to note that pensioners would still be receiving increases pegged to inflation and so would maintain their standard of living, they just wouldn’t be moving ahead of inflation and the rest of the population quite so quickly.

“Some final salary pensions and many individual annuities do not have full inflation-proofing. Higher inflation could therefore undermine the real value of these incomes. However we also note that a rise in bond yields following a Leave vote could equally have a significantly beneficial impact on final salary scheme deficits.

“The Treasury forecasts that productivity in the economy as a whole and household incomes would be lower by 2030. Based on these assumption it is reasonable to project that pension fund sizes would be lower, due to lower contribution rates and poorer investment returns. In the event that the Treasury forecasts prove inaccurate and that following a Leave vote, inflation does not rise and economic growth does not suffer, then future pension incomes would be no lower than under a Remain scenario.

“In a recent survey of fund managers conducted by Hargreaves Lansdown on the impact of Brexit, the majority agreed that Brexit would mean somewhat lower GDP in the short term – one to two years – but the impact was thought to lessen over the medium and longer term, with more than a fifth suggesting GDP could be somewhat higher in 5-10 years if we voted to leave the EU. Notably, two thirds of asset managers project that in the longer term, Brexit would have no impact on the economy.”