Defined contribution – Feature
ties will be small. “For the majority of people, low cost equity- driven solutions are probably with us for quite some time and that’s driven by a combination of a pretty ferocious price-driven market and a charge cap,” he says.
Dividends have suffered during the crisis too, as almost half of UK-listed companies have or are expected to axe shareholder cash returns. As the situation develops over the next 12 months, those most affected will be individuals in drawdown, for whom income is important.
The fate of interest rates adds to the problem. Julian Lyne, chief commercial officer at Newton Investment Management, believes that the crisis will definitely have an effect on the yield income funds pay investors and on the cash returns made by companies in some sectors.
“That period between 55 and 75 years of age when before the virus you would have wanted absolute return, you would have wanted income or an annuity, that whole period is going to become more difficult because of the impacts on income and on interest rates,” Lyne says. “That becomes a pretty big chal- lenge for individuals who are near or close to retirement. This will play out over the next 12 months.”
Responsible investing
There may be permanent changes to pension scheme invest- ment allocations arising from the crisis. Feelings of national solidarity that naturally intensify during a time of crisis expressed in such rituals as weekly applause for carers and NHS staff may also affect the world of DC pensions, as indus- try figures predict an increased demand for ESG-led strategies by scheme members. Lyne thinks the post-Covid investment environment could be characterised by different attitudes to governance and to divi- dends with fundamental changes in what is expected from investment managers. Instead of people seeing what funds they are invested in they will want to see those funds take the environ- mental, social and governance aspects of companies into account when making investment decisions, not just delivering returns. “The concept that greed is good is now so far out of fashion,” Lyne says. “It is about people perhaps wanting a balance between getting a return, of course, but also thinking about the environment, thinking about the social good, making sure we’re looking after people, making sure we’re doing the right thing for employees.”
While there was certainly pre-existing momentum on ESG, the Covid crisis could extend it. The outperformance of sustainable funds possibly benefitting from fluctuations in the oil price would only cement such a trend even further. Simon Chinnery agrees, feeling that the crisis could prompt pension fund members to engage more deeply with ESG considerations.
“Which companies have looked after people well in this time, which companies have behaved badly, these will be important,” he says. So far DC pensions appear to have withstood the buffeting gales of the Coronavirus crisis, for reasons of design and luck, figures in the pensions industry believe.
TPT’s Smith says that the industry has proved resilient in terms of its operational capability and – so far – in its invest- ments but he cautions that that is only because the markets have rebounded. “There’s nothing fundamental that has changed in DC pen- sions, either pre- or post-Covid,” he notes, adding: “DC pen- sions are still heavily dependent on long equity strategies and so if we were sitting here in six months’ time and look- ing at a much worse economic outlook we might be having a different conversation about the resilience of DC investments.”
One of the challenges Covid might pose is what happens if markets have been too optimistic about economic recovery. The macroeconomic effects of Covid on a new generation just entering the labour market for the first time could be significant. Smith believes that markets will continue to show high levels of volatility and that once the crisis is over, people may make poorer long-term decisions about their pensions. Pension schemes must focus on their individual members and be clear with their messaging during turbulent times, Smith says. They must put themselves in the shoes of individual members and consider how they might be thinking. “Be aware that you as the DC provider have a huge amount of responsibility; you’re a steward of their long-term savings and reflect on that and what we do for people in terms of their long term financial wellbeing,” Smith adds.
“This is an extraordinary event and it is going to have a big investment impact over the long term, but I just don’t think anyone knows how it’s going to play out. That uncertainty will be unsettling for people,” he says. But for all the gloom there may be some slivers of silver lining the Covid storm clouds engulfing pensions and investments. After all, one person’s market in the doldrums is another’s buy- ing opportunity. Newton’s Lyne explains: “If investing is all about buying oppor- tunities, when you have the long-term, you take advantage of the dip. If you are a DC investor and you have between 10 and 20 years to go, clearly you are benefiting from down cost averages.
“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,” he adds. Timing, as ever, is the key to successful investing.
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