Reciprocal
Tariff Announcement - what does it mean for your pension?
US President
Trump recently announced sweeping tariffs on goods from countries across the
world. A universal 10% tariff will come into effect on April 5 2025, with
higher rate tariffs on 57 countries becoming effective on April 9 2025.
What has
happened?
On 2 April,
President Trump held a press conference where he announced an executive order
invoking a series of reciprocal tariffs on a number of trading partners
globally.
Starting with
a baseline tariff of 10% on all imports to the U.S., President Trump announced
additional reciprocal tariffs on approximately 60 countries that have
significant trade imbalances with the U.S. The U.S. administration views these
tariffs as reciprocal because they are based on the tariffs imposed by these
countries on U.S. goods. Specifically, the tariff for each country is
calculated by taking the U.S. goods trade deficit with that country, dividing
it by the total goods imported from that country, and then halving that amount.
China, the
EU, Vietnam, Taiwan face some of the highest tariffs due to their significant
trade deficits with the U.S. Additionally smaller economies such as Cambodia,
Madagascar, Myanmar and Lesotho have also been subjected to substantial tariffs.
What has
the market reaction been?
The market
reaction has been negative. As of the time of writing, US Equities have dropped
approximately 4%, while broader global equity markets are down by a smaller
margin of about 1-3% with US 10-year yields falling nearly 20bps over the past
trading day and are dropping below 4%. Shorter dated bond yields are declining
more significantly than longer terms yields, leading to a modest steepening of
the yield curve.
Markets are
now anticipating a greater number of rate cuts by the Federal
Reserve as a result of the growth shock these increased tariffs may impose on
the US economy. Credit spreads are widening and the US dollar is weakening
versus all major currencies, particularly versus the Swiss franc and the
Japanese yen. Commodity markets are also not immune from these reverberations.
Oil has dropped significantly, driven by weaker global growth prospects and an
OPEC supply increase announced for May. Gold is holding relatively steady.
CERS investment Adviser Mercer give their view - date 08/04/2025
While our
expectations ahead of these announcements was for substantial tariffs to be
introduced, these country-by-country tariffs are larger than many, including
ourselves, expected. There are numerous estimates circulating around the
effective average US tariff rates, ranging from 20% - 25% with some forecasting
as high as 30%.
The tariffs
act as a big fiscal tightening with the collected revenues
leading
to an improvement in the US fiscal deficit. There is considerable uncertainty
as to how long these tariffs will last, how much of them will be negotiated and
substantially lowered/eliminated. Our initial assessment is that should if
these tariffs are implemented as planned and without significant fiscal
stimulus—which appears unlikely in the near future we are of the view that they
will cause a US recession in the near term.
However, it is worth noting that given these tariffs
were higher than most people expected, there is room for positive surprises if
they are negotiated away. Notwithstanding, the complex interplay of second
order effects from these policies.
In summary, at the time of writing, latest
developments have skewed global growth risks to the downside while increasing
inflation risks.
What
should I do when markets are volatile?
Individual
circumstances differ, and it is advisable to seek investment guidance when
appropriate. Unless you have
approximately 7-10 years or less
to retirement, your pension plan should be considered a long term investment.
Investment
markets are very difficult to predict (i.e. when they might fall and by how
much, when they will recover and by how
much). Getting these decisions wrong can materially impact the size of your
retirement account.
Instead, you
should ensure that your investment choices align with your risk preferences,
your personal circumstances, your
objectives, and your time to retirement. As everyone's circumstances are
different, we strongly advise you to contact a financial advisor for advice
before making a decision.
This involves investing in
growth-orientated funds when far from retirement, with the aim of
growing your retirement
account, and a
progressive move into funds which match the types of benefits you expect to
take at retirement over the
last
approximate 7-10 years before retirement.
The
strategies which are expected to provide the highest return over the long term
are also likely to
experience
the greatest fluctuations in returns over the short term. While short term
market volatility may be unwelcome this should not be of significant concern to
members far from retirement, as they have sufficient time to weather these
short term market fluctuations.
For members
closer to retirement (typically within approximately 7-10 years) the effect of
these swings is more problematic as
there may not be sufficient time for their savings to recover before
retirement.
I am not
close to retirement (approximately 7-10 years
or more to retirement)
Pensions are
a long term investment, so short-term market movements should not drive decision making. Switching to low
risk / return funds in response to short
term losses may lock in the reduced value of your retirement savings (i.e. you will have suffered the fall but won’t
benefit from any subsequent recovery in
your original fund).
Sticking with
your original choice may give your savings time to recover. In particular, we note the following:
•
If
you chose to move strategies with a lower expected long term return (e.g. cash), you should also consider that
you may need to save more for retirement
in order to offset your reduced expected investment return.
•
Similarly,
you may be tempted to reduce your pension
contributions in response to market volatility. Doing this will likely reduce your benefits at retirement and
result in the need to save more to
provide an adequate income at retirement.
I am close
to retirement (approximately 7-10 years or less to retirement)
•
Automatic
derisking “lifestyle strategies” are available to you, in which
risk is gradually and automatically reduced as retirement approaches. Information on CERS fund choices is available on this link
https://www.cers.ie/funds/investment-funds/
•
As
a general rule, it is considered best practice for members to move their
retirement accounts gradually towards
investments that match the type of benefits they may take at retirement in the last 7-10 years before
retirement.
•
Those
expecting to take a substantial portion of their benefits as cash lump sums may
wish to move a corresponding part of
their retirement accounts gradually towards cash funds.
•
Those
expecting to use a substantial portion of their benefits to secure an income
in retirement (an Annuity) may wish to
move a corresponding part of their retirement accounts gradually towards bond funds which tend to
move in line with the cost of buying an annuity.
•
Those
expecting to use a substantial portion of their benefits to keep investing
post- retirement in an Approved
Retirement Fund may wish to keep a corresponding part of their retirement accounts invested for growth.
•
You
should not need to worry if your retirement savings are invested in funds which
match the benefits you expect to take at
retirement as outlined above.
However,
if your savings are not invested in funds which match the types of retirement benefits you expect to take and
your savings have fallen in value, you
may wish to consider the following actions:
•
Getting
financial advice on the options available to you, taking account of your
personal circumstances.
•
Increasing
your pension contributions over the period remaining until your retirement to
help build your savings back up.
Financial
Advice
The CERS
Trustee preferred financial adviser is Milestone Advisory DAC. You can contact
them or your own financial adviser to assist you as you approach retirement.
You can contact Milestone Advisory DAC via the website (www.milestoneadvisory.ie),
by post: Linden House, 4 Clonskeagh Square, Clonskeagh Road, Dublin 14, D14
FH90, by email (info@milestoneadvisory.ie), or by phone (01) 406 8020.
Milestone Advisory DAC t/a Milestone Advisory is regulated by the Central Bank
of Ireland.
Where can
I find additional information
Information
on CERS monthly fund returns available on this link
https://www.cers.ie/funds/Investment-fund-returns/FundReturns2024-2025/
Information
on CERS fund choices available on this link
https://www.cers.ie/funds/investment-funds/
Monthly
investment commentary from CERS Investment Adviser – Mercer - available on this
link
https://www.cers.ie/funds/Investment-fund-returns/FundReturns2024-2025/
If you have
any further queries please contact the CERS team on info@cers.ie