Snap elections should not break your funding plan

So how did you spend your Easter Break?  Where you thinking of snap elections or snapping bits off your assorted eggs?  It seems the Prime Minister was doing the former, or perhaps both.   The PM  was very busy considering how to turn her statement made on the Andrew Marr show 4 September 2016 when asked “Under you, is that absolutely certain, that we’re not going to see an election before 2020?”  –  “I’m not going to be calling a snap election” into a “reluctant” decision to go to the Country on 8 June.  We can speculate on whether the wide gap in the polls or the need to get a clear mandate for Brexit negotiations forced the change but the decision is the decision and as Trustees we need to consider what it means for our Schemes.

Perhaps the most immediate effect is that the workings of government will effectively come to a stop if Parliament votes to override the Fixed Term Parliament Act (and it should with both Labour and the Lib Dems coming out in support of an early election).  The quaintly named period of purdah will come into force.  The Pension Schemes Bill which is currently being debated may be put on hold as government and the civil service goes into lockdown.  For the industry that’s interesting and important but for Trustees it is not the end of the World.

What Trustees are really interested in is how the Markets react.  As I write the pound is up and the Markets are down, but neither by a lot.  Elections, especially unexpected ones, create uncertainty and Markets don’t care too much for uncertainty.  It brings in a volatility and complexity for UK and European assets.  If you were being wildly speculative you could say that at an extreme the PM has got it wrong and the election could see a new government prepared to U Turn on the Brexit decision.  The more likely outcome is a Conservative government with an increased majority and a more stable platform to negotiate a Brexit on its own terms.  That stable platform is more likely to be beneficial for a stable Market and pound.

So what’s the message for Trustees?  Well we have a bit of a mantra on this when  events occur which give rise to market volatility and it holds true today. The last thing Trustees should do is react in a knee jerk manner.  Trustees should always take a measured approach to the investment strategies of the pension schemes which they oversee.  Pension scheme liabilities should be considered over the long term with investment strategies that are term appropriate to the liabilities held. When considering where to invest scheme funds, Trustees should take measured actions with the guidance of their advisers. This should take into account the funding position, the medium and long term goals and the ability of the Employer to support the downside risk.

Short term reactive thinking is rarely appropriate in this context where assets are involved in a long term investment cycle, not a weekly one. If your Scheme was looking to buy out imminently or your Employer covenant could not support equity volatility then the Scheme should already have taken these risks off the table.  Investment decisions should be as a result of considered and advised thought and not one off events.

So, having already got our investment house in order we can now stand back and watch the next few weeks events unfold with interest.