Protecting my pension against sterling crash

bleaky

What is the best way to protect or hedge an existing pension pot (now mostly in a sterling cash fund) against possible worst case pound crash scenarios as described by Kenneth Clarke in the telegraph recently?

It does not seem possible in most pension schemes to hold cash in non-sterling funds. I'm currently setting up a HL Vantage SIPP which has a wide range of funds but I'm not sure how best to protect myself. I'll have access to ETFs and any other exchange traded securities so what do I do?

Thanks in advance.

EdInvestor

Why do you need to do this?

purch

First question would be

"Do you know what effect a fall in the value of Sterling will have on your Pension ?"

If you know and understand what effect you are attempting to hedge against, then it will be easier to decide what to do.

bleaky

Well it seems to me that if I wish to use my pension fund to purchase non-UK assets (whether equities, bonds or whatever) then if the pound crashes then I'll be getting alot less of these assets for my money, for some unspecified period in the future.

Furher, if we really do have a bad meltdown then UK assets are exactly what I will not want in my pension, at least not until things get better, which they may never do AFAICS (personal opinion here of course).

I guess alot of this comes down to ones assesment of this risk ocurring, but as stated I wish to hedge against it, not bet on it ocurring.

What I am not clear on is whether if I invest now in say a US equity, whether that has removed my sterling exchange rate risk or not for that money so invested.

purch

If you invest directly in an Equity priced in USD (or any other currency) then your risk is the appreciation/depreciation of that currency.

Again if you trade in an ETF priced in USD (or blah blah) that tracks a market priced in USD (or .... ) then you have the same risk.

If you are buying via a Fund then you will still have a risk to GBP depending on the Fund managers trades.

bleaky

purch wrote: »

If you invest directly in an Equity priced in USD (or any other currency) then your risk is the appreciation/depreciation of that currency.

Yes, so I only run the ER risk in this case if I want to sell this US equity - at which point I am forced to convert back to £ before buying a new foreign equity. So time horizon relative to £ weakness (and/or $ strength) is relevant here.

purch wrote: »

If you are buying via a Fund then you will still have a risk to GBP depending on the Fund managers trades.

So if I invest in a £ denominated 'US equity' funds say, then I am exposed to ER risk depending on how often this fund manager buys and sells the US equities in the fund presumably? In fact this is the same issue as above, but out of my control? Is that right? I guess these managers could use forward contracts to limit ER risk but this would be completely opaque to me.

In which case the following strategies come to mind:

1) get a sipp in which you can hold cash accounts in foreign currency and use those accounts to fund foreign assest purchases.
2) invest in a £ denominated fund investing abroad and trust that the manager is going to minimise £ ER risk and that the £ weakness won't persist for too long.
3) get a sipp and use forward fx contracts yourself to limit ER risk - sounds complex and risky!
4) just restrict all pension purchases to £ denominated assets until such time as £ and blighty recover with respect to the rest of the developed world. After all if your pension has to be cashed in in £ eventually there is no point worrying about any of this.

Obviously charges for sipps, dealing as well as ER risk all factor in here I just have no experience to judge how to balance these potential costs against the risks.

Thanks for the feedback so far.

EdInvestor

bleaky wrote: »

4) just restrict all pension purchases to £ denominated assets until such time as £ and blighty recover with respect to the rest of the developed world. After all if your pension has to be cashed in in £ eventually there is no point worrying about any of this.

Quite so.

If you do want some foreign exposure at comparatively low risk, the FTSE 100 features many very large global blue chip companies which do much of their business in foreign countries and thus have significant historic experience in hedging risks on their shareholders' behalf. Some pay their divis in dollars.

I'm talking about the likes of BP, Shell, the big mining companies Rio Tinto, Anglo American and BHP, pharmas like GSK and AZN, big global banks like HSBC, Barclays, insurers like Aviva and the Pru, other multinationals like Vodafone, Pearson,British American Tobacco,Tesco, Tate and Unilever.

Some of these behemoths have been dealing with exchange rates and UK economic volatility for over a century.

jamesd

Why is it necessary to hold non-Sterling cash when you can instead hold money market ETFs?

bleaky

EdInvestor wrote: »

Some of these behemoths have been dealing with exchange rates and UK economic volatility for over a century.

So are you saynig that these companies are going to be basically unaffected as a result of a serious sterling crisis? I figure that if I compare FTSE100 vs the DJ equivalent through 1975 when we got bailed out by the IMF I can test this theory, however I can't find the historical data.

In any case, you are suggesting that £ in these stocks (presumably exactly what typical UK large cap fund is invested in) is going to be better than a £ cash fund. I can buy that - just wondering whether US large Cap or Jpn large cap might be even better.

bleaky

jamesd wrote: »

Why is it necessary to hold non-Sterling cash when you can instead hold money market ETFs?

These ETFs are not available from my current Standard Life scheme. Hence the thinking about moving some of my fund to a sipp where I can access this type of investment.

The reason for holding non sterling cash is so that I can move my investment from one non-£ asset to another non-£ asset without having to change back to £. It would allow me to invest to avoid £ weakness without worrying too much about the time horizon of £ weakness, which could be lengthy in a worst case scenario. Or am I missing something ?

EdInvestor

bleaky wrote: »

So are you saynig that these companies are going to be basically unaffected as a result of a serious sterling crisis?

No, they will make more money in sterling temrs.Divis denominated in foreign currencies will pay out higher amounts in sterling.

And in terms of future risk, the big blue chip companies are doing your hedging for you.

In any case, you are suggesting that £ in these stocks (presumably exactly what typical UK large cap fund is invested in) is going to be better than a £ cash fund.

Can't say that because the markets are very volatile so there may be fluctuations in share prices, unlike with a cash fund.But dividends should be considerably higher than UK interest rates in the short- medium term.