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Categorized | Financial

‘Tide of nationalism’ drives worsening pension deficits

Posted on November 27, 2016

Europe’s largest pension funds believe they will be severely hamstrung by the UK’s vote to leave the EU and what they see as a rise in nationalism following Donald Trump’s victory in the US presidential election.

According to a survey of 167 European pension plans, 92 per cent said market volatility would spike as a result of the “current tide of nationalism”, while two-thirds expect worsening pension deficits.

More than half additionally said investment returns would be handicapped by the Brexit vote, Mr Trump’s surprise victory and the forthcoming EU referendum in Italy.

Pascal Blanqué, chief investment officer at Amundi, the French asset manager that compiled the survey, said: “The current tide of nationalism has added yet another layer of uncertainty for pension investors. The result of the presidential election in America threatens old certainties.

“It is hard to imagine anything resembling a happy ending for any investor group.”

The Brexit vote presented immediate problems for UK pension funds, after the government moved to lower interest rates in July. The decrease forced the total pension deficit of the UK’s 350 largest companies up to £139bn at the end of the same month, which rose again to £189bn in August, according to Mercer, the pension consultancy.

The number of UK pension plans in deficit also increased to 4,995 after the UK’s vote on EU membership, according to Amin Rajan, chief executive of Create Research, the consultancy that co-wrote the report with Amundi.

“The Brexit vote has opened Pandora’s box. It may well trigger the return of volatility on the scale that roiled the markets during the Greek crisis of 2010-2013, if the divorce gets ugly and protracted,” he said.

“Pension funds will ultimately be punished if the politics of fragmentation is intensified by the outcomes of the forthcoming EU referendum in Italy and elections in Austria, France and Germany.”

The report, entitled “Expecting the Unexpected”, also found that 76 per cent of pension funds expect a “further disconnect” of market prices and their fundamentals as a result of the rise of nationalism, while 74 per cent expect “increased contagion susceptibility” between global markets.

The manager of one UK pension fund, who spoke to the authors of the report anonymously, said: “The real significance of the Brexit vote and the subsequent result of the US presidential election is that they show how nationalism now triumphs over globalism. Populism is on the rise in Europe and global trade and growth are at risk.

“The recovery period of our own pension scheme deficit is now extended from 10 to 15 years as a result.”