The immediate impact of the Brexit vote both on the values of the global stock markets and the currency exchanges has been well documented and opined on at this stage. Pensions, by their nature, are longer-term investments. Relatively short-term fluctuations in the markets are generally factored into their growth patterns.
However, some pension investors react in a speculative manner to this short-term volatility and typically wish to turn to cash funds in order to avoid the further fall in the valuation of their fund. The immediate suspension by a number of the property pension funds of trading in the UK funds is a perfect example of this as their clients rushed to either withdraw or transfer to safe-haven type funds.
As history continually informs us, those who withdraw their funds at a time of perceived crisis typically time the markets incorrectly and end up missing out on the “rebound”. This was the case again in the seven days after the Brexit vote where the markets fell and rebounded to a greater extent within a short period of time.
Market sentiment is driven primarily by the confidence people have in the information that they receive. The biggest negative potential of the Brexit vote on pension funds is not the fact that the vote was passed but rather the uncertainty that it now brings on when this exit will happen and the consequences this will have on the UK economy in particular.
Lack of clarity of information breeds fear in the markets. Clearly, the longer this fear is allowed to fester the more negative it is for the stock markets in general and as a result pension funds.
What will alleviate this fear? Crucially it would appear that the primary factor impacting markets since the result is the specific actions that will be required, and when they will occur, to exit the U.K. from the European Union. It is likely that this will take a considerable period of time to happen and if so, markets as many times before, will adapt to the changing circumstances.
From an Irish perspective and indeed Irish pension funds the above logic also applies in that the funds are invested for a longer term gain and short term adjustments will typically not be dramatic. The international crisis of 2008-2009 will likely have had much more dramatic negative impact on pension fund values than the Brexit vote did.
When deciding the placement of “new” pension funds in the coming years pension funds will obviously be very conscious of any uncertainties that the exit may bring and this may mean that, at least in the short term, there will be less inclination towards investing in Sterling investments than would have been the case heretofore. As has been said in the many column inches dedicated to this topic in recent times, it is likely that the pension managers’ reluctance to invest will be tempered once the specific exit requirements are finalised.
Money markets adapt to new information on a very regular basis and therefore are arguably the most flexible in terms of the requirements when change occurs. Investor sentiment is a different matter however and, while some may panic and divest of Sterling assets quickly due to the current sentiment, it is likely that longer term pension funds will remain invested and continue to perform in line with expectations and benchmarks.