Feature – Defined contribution


Long before a bat was believed to have transmitted Coronavi- rus to a human, the world of defined contribution (DC) pen- sions was in a state of constant flux. There was a steady stream of regulation to be absorbed as well as investment decisions to be made in step with market movements.


Then the virus crossed from one species to another and began its fateful journey across populations and economies. DC schemes have not proved to be immune to its effects as it has impacted their members and the markets in which they are invested.


Though we are still in the eye of the Covid storm and as the dust has yet to settle and the long-term effects become clear, some broad industry currents can be discerned. One is a hard- ening of pre-existing trends, such as the consolidation of smaller schemes into master trusts that can benefit from econ- omies of scale while having a more robust governance structure. Simon Chinnery, head of DC client solutions at Legal & Gener- al Investment Management (LGIM), says the trend towards consolidation is long term, partly driven by The Pensions Reg- ulator, which has made it clear that governance demands on smaller schemes were not going to ease and that their account- ability for a range of issues was not going away. “Schemes needed to step up to the plate and if they cannot then they should look to hand that responsibility over specifi- cally towards master trusts,” he adds. “We definitely have seen a strong growth in master trusts.”


Duty versus temptation


Immediate threats to the infrastructure of DC pension schemes appear to have been withstood as operationally the industry has coped well, with business recovery plans dusted off and implemented with speed and efficiency. Philip Smith, director of DC at TPT Retirement Solutions, describes activity in the industry as “very much business as usual”, with staff working remotely and not much in the way of an impact on customer services. However, as entire market sectors come under intense and sustained pressure and companies teeter on the brink of col- lapse, there may be a temptation for employers and members to scale back their pension contributions.


Although the regulator will remind companies that they have a duty to continue making contributions to their employees’ pensions, Chinnery can envisage the size of those contribu- tions changing for a period to reflect the challenges that com- panies are facing.


“I think people will feel that something has to give in terms of their savings; while there may be some short term reductions, the Pensions and Lifetime Savings Association, government and the regulator will say to companies and individuals that it is


40 | portfolio institutional May 2020 | issue 93


important you continue to save for your future,” Chinnery says. “If we see a little drop down in contributions that is under- standable,” he adds, “but it would not surprise me at all if there is a concerted effort later in the year when we have more visi- bility about how we come out of this for people to keep on saving.” Yet in what is surely a sign of the innate resilience of DC pen- sion funds, there are no signs of any defaults in contributions. According to Smith, the impact of Covid-19 on the DC market so far has been quite muted, as markets have rebounded since their initial drop. “We have seen call volumes into our customer service centre flatten out, so people don’t seem to be particularly worried about the market drop; people have had other things to worry about. This might be a good thing as otherwise people may have taken some poor decisions,” he says, adding: “So far we have not seen any real switching activity beyond normal.” Another trend that is likely to harden, some industry experts believe, is the drive towards investment diversification, as Cor- onavirus relentlessly hammers home the lesson that investors should never put all their eggs in one basket. Yet despite mar- ket volatility DC pensions’ long partnership with equities is not expected to fracture.


TPT’s Smith anticipates a rising proportion of schemes will consider the attractions of alternative assets as the industry achieves ever greater scale but that any move away from equi-


The challenge for people at any time of market volatility is when they do not have the benefit of timescale and they are in the wrong investment. Julian Lyne, Newton Investment Management


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