The Impact Of The Brexit Referendum On Pension Funds

Reasons for Brexit

Discuss about The Impact of the Brexit Referendum on Pension Funds.

The Brexit Referendum occurred in 2016 when the United Kingdom Government opted to withdraw or to exit the European Union. During that referendum, 51.9% voted to leave the European Union (Kao, and Authers, 2016, pp.2-50). This essay discusses why Britain opted to leave the European Union, and the action taken by the Bank of England weeks and months after the decision of the United Kingdom to leave the European Union. It also discusses the impact of the actions of the Bank of England actions on matters relating to the pension industry in the United Kingdom (Kao, and Authers, 2016, pp.2-50). This essay also discusses the obligations of pension funds and the rates of returns of pension funds to meet those obligations (Kao, and Authers, 2016, pp.2-50). Lastly, the essay evaluates the impact of Brexit on the rates of return for pensioners to maintain an acceptable standard of living concerning investment in the real estate industry (Kao, and Authers, 2016, pp.2-50).

There are three main reasons why Britain wanted to leave the European Union, namely: economics, immigration and identity (Arnold, 2012, Pp.210-299). The economics issue is that the United Kingdom sends money to the headquarters of the European Union (EU) known as an annual contribution, which the country is eligible to comply with or to contribute as a member of the European Union. The main aim of these grants was that the European Union could aid in matters relating to trade in a free market economy (Arnold, 2012, Pp.210-299). Ideally, the European Union could reduce the risks associated with trading and at the same time enable Britain realize high returns from trading at a common market (Arnold, 2012, Pp.201-299). The arguments for the United Kingdom were that these contributions were being redistributed to other member states, which could be used in other activities.

The disadvantage of this is that leaving the European Union would lead to a wreck in the British Economy and probably the World Economy (Bbc.com, 2016). This is because Britain would be forced to leave the common market where they used to sell their goods in exchange for other products and services or cash for favorable terms unless they came into bilateral agreements with the European Union (Arnold, 2012, Pp.300-319). Despite these bilateral agreements, even if the European Union allows Britain to trade in the common market, they would be forced to sell under unfavorable terms in that they would not be protected against risk and returns.

Major Actions were taken by the Bank of England following the Decision of the United Kingdom to Leave the European Union

The United Kingdom Government also opted to leave the European Union due to immigration. On this factor, when Britain was a member state, any member of the European Union was able to relocate and work in the United Kingdom without needing a work permit or visa (Arnold, 2012, Pp.300-319). Here, the government of the United Kingdom non-citizens of the United Kingdom would come up and use the already scarce natural and public resources such as National Health Service and welfare. The government was afraid that immigration would lead to overcrowding in urban areas as well as depletion of resources that were already scarce (Arnold, 2012, Pp.300-319). Space was also limited, and immigration of the non-citizens would have led to overcrowding and hence overpopulation. Other Democrats argued that immigration was good for the economy. They made this claim in that they believed that it would open a way so that the United Kingdom could trade in other countries (Arnold, 2012, Pp.300-319). It would also reduce the barriers and tariffs to trade as it would be perceived as they were upholding the interests of the people of the member states of the European Union.

The last reason but not the least why the United Kingdom opted to exit the European Union was issues relating to identity (Bodie, Kane and Marcus, 2014, Pp.310-318). Here, the people of the United Kingdom did not perceive themselves as Europeans, and the question they had in mind was whether the British identity in the European Union was a complicated one. Ideally, as a member state the United Kingdom had to comply with the various European Union policies which some seemed overly constrictive and ridiculous such as the policy relating to bananas and pet horses (Bodie, Kane and Marcus, 2014, Pp.310-318). Here, the Brussels bosses banned the selling of rogue bananas that had malformations and abnormal curvatures. These restrictions seemed absurd which made the United Kingdom opt to leave the European Union (EU). The other restriction was on pet horses, which made it illegal for people to eat pet horses. However, they were still allowed to eat other horses (Bbc.com, 2016). The government of the United Kingdom (UK) argued that since they were allowed to eat other types of horses, they had to be allowed to eat other horses (Bodie, Kane and Marcus, 2014, Pp.310-318). Due to this disagreement, the United Kingdom opted to leave the European Union.

Impact of the Actions taken by the Bank of England on the UK Pension Industry

Major Actions were taken by the Bank of England following the Decision of the United Kingdom to Leave the European Union

The Bank of England anticipated a period of uncertainty and adjustment weeks and months after Brexit. Here, they expected that there would be volatility in the market and the economy. The Bank of England was well prepared for this (Layne, 2014, Pp.198-218). They engaged in extensive contingency planning or other words known as ‘Plan B.’ Because of this, the Bank of England had to raise over £ 130 billion of capital by offering loans at a high interest rate to cater for the fluctuations and the volatility of the economy and the market. 

The Bank of England also planned to assess the economic conditions of the United Kingdom after their exit in the European Union. They also judged that the risks that were associated with Brexit were the most significant ones as all sectors of the economy both private and public would be affected by the exit of the United Kingdom from the European Union. They claimed that the departure would lead to financial instability in the country. To mitigate these risks, the Bank of England took actions such as ensuring that the core of the financial systems of the United Kingdom was well-capitalized, stable and liquid (Layne, 2014, Pp.198-218). They were able to do this since the Bank of England had liquidity facilities about the sterling and foreign currencies preventing the erosion or depreciation of their currency against other currencies.

The Bank of England took other actions such as consulting and cooperating with all the relevant domestic and international authorities such as the World Bank. This was done to ensure that the financial system of the United Kingdom could be able to absorb any financial distress and that it could be able to concentrate on serving the real economy (Layne, 2014, Pp.222-261). Due to the decisions made by the United Kingdom, the economy country had to adjust to new trading relationships. The contribution or the actions of the Bank of England to this matter were that they would continue to relentlessly pursue their responsibilities for financial and monetary stability in the United Kingdom.

Obligations of the Pension Fund

After Brexit, the United Kingdom’s pension funding hit £ 900 billion. This resulted in a deficit after the surprise vote that Britain made to leave the European Union (EU). This shortfall prompted some concerns about the future of some retirement schemes since the government would not be able to afford the payment of pension funds anymore (Oliver, 2016, pp.99-110). The vote to leave the European Union was unpredicted and therefore financial markets had not priced in the possibility of the Brexit. According to John Hatchet, the head of corporate consulting at Hymans Robertson, pension funds had limitations such as their ability to adequately protect themselves from such stresses and uncertainties (Layne, 2014, Pp.222-261). Following their vote to leave, the falls in the expectations of the country for the gross domestic product (GDP) of the United Kingdom (UK) would weigh on the equity markets as well as the interest rates. This would, therefore, put more pressure on the funding. The Bank of England implemented actions such as small saving interest rates. According to various financial analysts, many pension funds would implode in the next three years if the Bank of England continues with the low interest rate policy. The Brexit would, therefore, create more pain for the pension funds since there would be continued volatility in the market thereby affecting the health of the benefit schemes of the United Kingdom (Layne, 2014, pp.222-261). These analysts further state that the increased volatility of the sterling pound and the euro would also have a further impact on the pension schemes set by the country. 

Obligations of the Pension Fund

Required Rate of Returns for Pension Funds to Meet those Obligations

After the Brexit, the pension funds in Europe were likely to implode over the next two to three years as the Bank of England continued to offer the low interest rate policy (Tatham, 2016, Pp.8). In this case, the required rate of return for the pension funds would be little since the country could no longer afford to pay them or to meet those obligations. The volatility of the yields of retirement funds as well as the sterling pound and the euro would have an effect on the pension schemes as the possibility of the government of the United Kingdom to default payment of those obligations would be very high (Learner, 2016, pp.402). According to David Bennett of Redington Investment Consulting, massive deficits would become the biggest concern for example in BHS, which collapsed this year leaving behind a deficit on pension funds of £ 571 million (Goodwin, and Heath, 2016, pp.323-332). Apparently, after the Brexit, many corporations both private and public were unable to pay the pension funds for their employees as the Bank of England had taken actions such as the low interest rate policy.

The Impact of Brexit on the Required Rates of Return for Pensioners to Achieve and Maintain an Acceptable Standard of Living

The Brexit set back the rates of return of pensioners. Many organizations were unable to meet the pension fund obligations because the Bank of England had taken precautionary measures such as the low interest rate policy (MacShane, 2015, pp.1067-1094). Since the pensioners received small pension funds or none at all, their standards of living tremendously decreased as they could not be able to cope up with the rising costs of living in the United Kingdom (UK) as the sterling pound and the market kept on fluctuating. Many pensioners could no longer afford health care facilities and food as they had heavily depended on the fact that they would be given pension funds by the government, which they would use for survival. This in its entirety shows that the Brexit reduced the returns of the pensioners thus making it impossible to achieve an acceptable standard of living.

Conclusion

The rise of the Brexit was the increase of all problems for the U.K. It greatly influenced the country in terms of trade and fluctuations of the sterling (Emerson, Avery, Beblavy?, Behrens, Blockmans, Brady, Gros, Ha?jkova?, Lannoo, ?azowski, Nu?n?ez Ferrer, Peers, and Wriglesworth, n.d., Pp.1-109). The U.K. was unable to meet its obligations of paying pension funds thus reducing the returns to meet those requirements. Lastly, the rise of the Brexit led to low standards of living to the residents of U.K.

References

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