COVID-19: good, bad or a flash in the pan? What does this mean for DC members?
An unusual title for an article based on the impact of a pandemic on the pensions landscape. There has been a lot of coverage on the impact of COVID-19 in respect of Defined Benefit (DB) schemes in terms of employers being forced to defer their deficit recovery contributions coupled with the sharp increase in deficits as a result of the fall in investments. But for me the bigger crisis is the long term impact this pandemic will have on the Defined Contribution (DC) pots. We have known for years that members of DC arrangements bear all the risk and this is the time to help them through this minefield.
Many investment advisers say the worst is over and stock markets have bounced back. If you look at the statistics that is true but what long term impact has this had on member pots?
For members in lifestyle arrangements , quite often the default fund, the impact as you might imagine, has seen those in the growth phase of the strategy bear the most significant loses with a 25-30% drop in the value of the funds, primarily due to the focus on growth assets. Those at or near retirement have seen the smallest impact of around a 10% drop in assets due to the move out of growth assets. And those that are in the decumulation phase have seen drops of around 15%.
So what does this actually mean and what can we learn from this?
For members in the growth stage it is an opportunity to buy, buy, buy. Assets are cheap now so one gets ‘more bang for your buck’ and time is on their side . This is the good.
Those in the decumulation phase, 50 onwards depending on how far out from retirement switching starts, are likely never to recover from this pandemic. Their funds will be switching from growth funds whilst the market recovers and it is likely that their retirement funds will remain 10% lower than they were pre-COVID-19. That is a sobering thought for me as I am smack bang in the middle of that group. If I find this scary, I suspect there is a whole cohort of members who have no idea that their retirement plans might be in jeopardy.
Pandemics are, we hope, a once in a lifetime event but it will have long reaching effects, particularly for those who are retiring, whether this was planned or unplanned. Fund values have dropped overnight; can members afford to retire now? If not, will their employer allow them to stay on? Is the retirement unplanned but necessary as their employer has been forced to make them redundant or reduce their hours because they can no longer keep them on?
I am not sure we have ever had to consider these situations before where markets have dropped coupled with wholescale redundancies. Neither scenario can be planned for or necessarily be within our scope to manage.
I feel I am left with more questions than answers, or is that just me?
Is this crisis more about communications than it is about investment? The Pensions Regulator’s (TPR’s) guidance is clear that it should be business as normal; DC to DC transfers should still be processed. I have also read a lot and heard about scammers cashing in on this situation. Speaking to one of the larger workplace pension providers in respect of my scheme members they have not seen any uptick in transfer activity. In my view, and this is my view and not that of the PMI, I feel the Regulator has missed the mark on how to deal with this pandemic in terms of how schemes can support their members through these times. It is less about scams but more about how we, as an industry, deal with those members who were on the verge of retirement or those members who are over 55 and need to boost their income due to redundancy or enforced reduction in hours. Does the Regulator’s guidance go far enough?
Guidance is needed on how providers, trustees and employers support members and employees through these uncertain times.
Does the default fund as we know it need reviewing? Has the charge cap caused some default fund strategies to move away from some of the absolute return funds which have potentially seen the smallest drops in values? Have we been forced to shape investment funds structure on cost rather than ensuring that our default options are more resilient? I am sure if I asked my scheme members what is more important to you, having a cheap fund that may or may not protect your money in adverse circumstances, or pay slightly more for a fund that is more likely to provide greater resilience in times of adverse circumstances we may get a different answer from where we are currently.
I have not touched on how we protect members who are in selfselect funds. This cohort tends to be more engaged but again, it comes down to how we communicate with them: remind them to review their funds regularly.
Communications are key but are we looking at this the right way? Are we telling people what we think they want to know or what they actually want to know? Are we listening?
Last update: 26 February 2021