Article

25 years of the £2 coin

5 min read 22 Jun 23

Brief history

The £2 coin was first introduced in 1986 to commemorate the Commonwealth Games in Edinburgh. However, it wasn’t until 1998 when it first came into circulation. It is a bimetallic coin, weighing c.12 grams and is made from copper, nickel and zinc!

Almost exactly 150 years prior to its launch, in 1848, Prudential was founded in London as an insurance company. The most recent evolution of the With-Profits products, PruFund was launched in 2004.

Whilst the Royal Mint does not disclose the cost of minting coins, or the exact weights of each metal used, we attempted to approximate this. Using publicly available information, we estimate that the current metal value of each £2 coin is around £0.09.

This marks c350% increase in value of the physical metal used in the coin since its first circulation!

The current “real value” of the £2 coin

If a £2 coin was kept under a mattress from the launch to now, the real value of that coin would’ve fallen. Today’s value in real terms would be worth roughly £1.07! This is due to inflation.

The impact on regular household items is even greater than average, and our research shows that as inflation eats into the purchasing power of money, the same £2 could buy only a fraction of regular household items compared to 25 years ago. According to data from the Office of National Statistics (ONS), at launch, a £2 coin had purchasing power of 160 cups of home brewed tea compared to just 65 now. An average household could’ve bought 4 loafs of bread, or 20 bars of Freddo with £2 compared to just one loaf of bread or 8 Freddo bars now.

As a different example, if we were to gather bags of £2 coins for a 10% house deposit, our estimate show that the bag would now weight 170 kilograms compared to only 40 kilograms in 1998. This reflects the increase in UK house prices, which more than quadrupled since the launch of the £2 coin!

^{Source: ONS, local Tesco prices, as at 2nd June 2023}

Could the value have been preserved?

Instead of storing the coin under a mattress, it could’ve earned some interest if deposited in an easy access UK bank account. The coin could have also been invested in the UK stock market such as FTSE 100, which would’ve seen its value growing to £6.08. Or an alternative option would’ve been investing in a PruFund, where the £2 would’ve accumulated to a value of £7.60.

^{Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2018. FTSE Russell is a trading name of certain of the LSE Group companies. e.g., “FTSE®” “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®, The Yield Book®,” are a trade mark(s) of the relevant LSE Group companies and are used by any other LSE Group company under license. “TMX®” is a trade mark of TSX, Inc. and used by the LSE Group under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data.}

^{Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.}

^{UK bank deposit rate uses a combination of data sources including Macrobond and Federal Reserve Economic Data (Fred). The rate is representative of sight deposit rates UK households could get from bank savings in an instant access account without facing any penalty either on withdrawal or by closing of the account.}

^{Calculations were ran on 2nd June 2023. For bank deposit rates the last available date is end April 2023.}

^{Past performance is not a guide to future performance. The value of your investments can go down as well as up so your client could get back less than they put in.}

^{*Multi-asset fund reflects a peer group. The peers are life funds operated by Insurance companies with an investment strategy which includes different types of assets, but with between 20% and 60% in stocks/shares.}

We have then translated into what that means for the key household items we highlighted in the previous section.

^{Source: ONS, local Tesco prices, as at 2nd June 2023}

^{*Multi-asset (MA) fund reflects a peer group. The peers are life funds operated by Insurance companies with an investment strategy which includes different types of assets, but with between 20% and 60% in stocks/shares.}

PruFund and does it cater for inflation?

PruFund refers to a range of multi-asset funds as it invests in various asset classes, across multiple geographies. Therefore, a PruFund investor won’t have all their eggs in one basket.

The large size of PruFund is also an advantage as it provides greater opportunities to gain exposure to asset classes beyond traditional stocks and bonds investments, including real assets. Investing in real assets has been particularly helpful in the current climate as some of these assets can move positively with inflation.

^{Source: Long Term Investment Strategy (LTIS), as at 2nd June 2023}

Inflation, also known as the ‘silent killer’, has been less than silent over the past two years. Since the world reopened from covid induced lockdowns, the inflation rate in the developed world reached a 40-year high last autumn. Whilst the headline inflation rate has been falling, especially on the back of the current interest rate hiking cycle – the figure remains uncomfortably high. This is particularly true for the UK where the latest (May) annual inflation rate stands at 8.7%, compared to 4.0% in the US and against the policy target of 2%. The BoE Governor Andrew Bailey acknowledged that inflation was “taking a lot longer than expected” to come down.

Inflation is one of the key macroeconomic risk factors that we consider when setting the Strategic Asset Allocation (SAA) for PruFund range. Over the past two-years we have strategically shaped our allocation to mitigate inflation risk with real assets. To measure an asset’s usefulness in providing inflation protection we focus on both the quantity and quality of its inflation mitigating characteristics. This includes:

Sensitivity to inflation, which measures the change in the asset’s return, relative to the change in inflation.
Stability to inflation, which shows how consistently an asset class performs relative to inflation over time.
Added risk-return costs and benefits, which may include added benefits in the form of an illiquidity or origination premium.

These are some of the reasons behind having allocations to private assets such as infrastructure and property.

Outside of inflation risk, PruFund is quite special in the way it shields investors from short-term ups and downs of the market, i.e. market volatility risk. Whilst PruFund aims for a steady growth over the long-term (5-10 years), it does so in a “smooth” way. This is known as the “smoothing process”. It means the investor will not suffer from the full negative effects during a down market but will also not benefit from the full positive effect from an up market.

Over the last 25 years the With-Profits Fund, of which PruFund has been a part of since it launched 2004, has provided better outcomes for customers compared to investing in UK’s largest 100 stocks; the FTSE 100. More importantly, the journey has been considerably less bumpy.

^{Source: Datastream, Macrobond, LTIS calculation, as at 2nd June 2023}

We can’t predict the future, past performance isn’t a guide to future performance.

The value of your clients’ investment can go down as well as up so they might get back less than has been paid in.

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"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company Limited. The Prudential Assurance Company Limited and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc which is a holding company registered in England and Wales with registered number 11444019 and registered office at 10 Fenchurch Avenue, London EC3M 5AG, some of whose subsidiaries are authorised and regulated, as applicable, by the Prudential Regulation Authority and the Financial Conduct Authority. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.