Trustees urged to keep their cool on news of hung parliament

Questions over the country’s leadership and government's stability, on top of the uncertain outcome of Brexit negotiations, did indeed not help in sending signals of reassurance to investors.

The most immediate impact of the election on pension schemes was from a movement in sterling.

Good news for holders of overseas assets

The pound plummeted overnight as it became clear there would not be an overall majority for any party, in turn pushing up the FTSE with its large foreign earnings exposure.

“Such a movement affects the UK stock market, as well as portfolios exposed to foreign currencies,” said Bob Campion, senior portfolio manager at Charles Stanley.

“A weaker pound would be good news for pension schemes with large exposure to foreign currencies in their portfolio,” he added. 

A hung parliament is negative for sterling, particularly against the euro, as it will likely complicate talks over Brexit and increase the chance of ‘no deal’, Campion said.

This might especially be the case if the Conservatives agree a coalition, as whoever will be prime minister is likely to be more influenced by the hardliners in the back benches, he noted.

A coalition led by Labour seems unlikely with the result as it stands currently.

“However, some argue that a hung parliament proves good news for the pound if it leads to the prospect of a centre-left coalition that pursues a ‘softer’ Brexit,” said Campion, but added that this was unlikely in the short term.

What will be the effect on Brexit negotiations?

But others said an unstable government resulting from this election outcome would not last throughout tough Brexit negotiations.

“There is a possibility that fresh elections could take place in late 2018 [or] early 2019, around the time the final Brexit relationship is known,” Rowena Geraghty, sovereign analyst at Standish Mellon, pointed out.

The uncertainty over whether Theresa May will remain leader of the Conservative party also leads to other questions.

“This result raises a lot of uncertainty over the type of fiscal policy to be adopted,” said Geraghty, adding that gilts would be subject to shifts in sentiment.

Should trustees care?

However, long-term investors have seen elections come and go, and more than a short-term wobble is needed to make them review their investments.

Steve Delo, managing director at Pan Governance, believes the UK election is likely to be of low significance compared with other events around the world.  

“There may well be some short-term UK market froth… but this will settle down fairly quickly back to the ‘norm’ driven by wider, international economic effects,” he said.

Delo advised trustees to essentially not do anything in reaction to the election unless they have a strong view on the correlation of investments to certain outcomes.

“However, trustees in that situation need to be extremely self-critical, as they may simply be trying to make important decisions based on nothing more than a hunch,” he warned.

“It might feel like incisive investment governance but it is in reality a high-class version of picking a horse and backing it – or putting a large portion of the fund on red at the roulette table.”