Lifestyling strategies used by the default DC pension schemes have helped protect members from worst effects of the severe stock market correction that has followed the coronavirus pandemic.
Pension advisers and trustees say these strategies have meant that those approaching retirement have seen far smaller losses.
Capital Cranfield professional trustee Andy Cheseldine says: “Looking across a range of different DC options there is evidence that lifestyling has worked.
“Before the recent improvement in markets, it looked like those who are one or two years from retirement are on average seeing losses of just 1 or 2 per cent.”
Those further out may have seen more significant falls in their portfolio – given the higher equity content of these funds at this stage. But Cheseldine says they have 10 or 20 years to make good these losses.
Although lifestyling appears to have delivered for members, providers say the current correction is likely to lead to a review of default investment strategies.
Royal London proposition strategy and insight manager Ronnie Morgan says: “There is no doubt that default strategies will be reviewed in light of recent events, particularly in relation to overall equity content. It will be a case of kicking the tyres to ensure strategies are robust and will deliver long term stability and good outcomes for members.”
He says that perhaps there has been a tendency for some funds to “shoot the lights out” during periods of market growth, and this will have to be analysed against the effect of the recent market falls.
The People’s Pension’s director of policy and external affairs Gregg McClymont says that when this crisis first took hold and markets fell their main priority was ensuring liquidity.
After initial problems, he says, the bond market has stabilised, which has helped. “For a while it looks like there were just sellers and no buyers of any type of asset, but this has eased for the moment. But we are not taking this for granted and are planning remains focused on liquidity issues.”
Figures calculated by Corporate Adviser show that there are reasons for positivity, despite the extent of these market falls. Looking at the performance of some of the largest default funds, Corporate Adviser calculates most members are looking at positive returns over a five year period during the growth phase, even with these recent market falls.
Initial findings suggests funds that have taken a more defensive approach may not have delivered higher returns over these longer periods, as they have missed out on some of the equity growth in recent years. However much will depend on market movements in the months ahead. Given the likely severe economic impact of the lockdown this could be a protracted bear market.
Premier Benefit Solutions head of employer services Sue Pemberton says there is a challenge for schemes, and their advisers, to ensure this information is clearly communicated to members.
To date scheme and advisers say they have had relatively few calls from members, concerned about market falls.
First Actuarial DC consultant Neil Kempshall says: “For many members at the moment they have more immediate concerns – be it their health, their job security and their monthly income. Pensions are well down on the pecking order.
“This may change though as and when people receive their annual statements and discover their pension is worth a lot less than it was the year before. Of course, this will depend though on how quickly we get back to normality and whether this prompts a stock market recovery.”
Punter Southall Aspire managing director Alan Morahan adds that to date there appeared to be little contact from employees. “At the moment they are sitting on their hands, and that is a good thing. Many may have understood the message from previous stock market falls that it pays to sit it out and it doesn’t make sense to crystallise losses.”
However Morgan says that Royal London has seen a very small proportion of investors switch to cash in response to the market falls.
Advisers said that one of the longer-term effects of this particular stock market correction may be to increase the move towards more ESG-styled funds, which take account of environmental, social and governance (ESG) factors alongside traditional financial metrics.
There has been an increased take up of ESG-strategies within DC pension scheme in recent years, but Morahan says he expects this to pick up pace.
“One of the effects of this pandemic and lockdown has been that we are looking at different ways of working. Technological solutions are making this possible and we can see the effect this has had, for example on pollution levels. This might be the step change that makes many in the industry look more seriously at these issues.”
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