Pensions Policy Institute – Industry view


as the volatility was caused by external factors rather than economic shifts, the subsequent recovery has been particularly rapid compared to previous market down- turns of this magnitude.


Lauren Wilkinson is senior policy researcher at the Pensions Policy Institute (PPI)


DC SCHEMES HAVE BEEN RESILIENT, BUT MUST NOW REFLECT ON THE LESSONS OF THE PANDEMIC


The last two years have been a challeng- ing and uncertain time as governments, businesses and investors have responded to the Covid-19 pandemic and its economic effects. Defined contribution (DC) schemes have been relatively resil- ient, but their experience of, and reaction to, the pandemic may offer lessons for weathering future crises. Long-term investment horizons and diver- sified portfolios helped DC schemes to cope with the extreme short-term volatility seen in the early months of the pandemic. The most obvious investment impact of Covid-19 in 2020 was an exceptionally high dispersion of returns between differ- ent asset classes, as the pandemic proved helpful to some businesses and harmful to others. While experiencing significant asset price declines and volatility early in the pandemic, pension funds appeared to fare better than stock markets in general because most pension funds are fairly diversified, holding lower-risk assets alongside more volatile equities. However,


The immediate impact of volatility on those near to, at or in retirement suggests that lifestyle strategies still have an impor- tant role to play post-pension flexibilities. The prevailing view was that savers could benefit from delaying access to their pen- sion pot for as long as possible to give them time to recoup losses, as well as making additional contributions to help restore pension pot values more quickly. This caution was reflected in the number of DC pots accessed during 2020, a sig- nificant decline on previous years; around 277,500 DC pots were accessed for the first time in 2020, compared to 433,000 in 2019, a 36% decrease. While the data suggests that many savers were able to postpone accessing their DC pot, for others this is more challenging in practice. Those on lower incomes, as well as those experiencing disability or long- term illness, are likely to find it more diffi- cult to postpone retirement as they may not be able to supplement income with earn- ings. Lifestyling strategies are particularly important for these individuals who are unable to implement other strategies to give their pension savings time to recover from market shocks, although bonds were not immune to the volatility experienced in the early months of the pandemic. The uncertainty and volatility associated with the pandemic encouraged many schemes to review their investment strat- egy to ensure that risks and opportunities presented by the pandemic were appro-


priately accounted for. However, economic uncertainty led to many choosing not to take immediate action in relation to asset allocations. This pragmatic approach pro- tected schemes from crystallising losses. But now that the landscape has stabilised, many are likely to carry out a further review in light of their experience. While


the pandemic has introduced


uncertainty and risk, it has also presented opportunities for investment. Uncertainty and shifts in economic activity resulting from the pandemic, and espe- cially consecutive lockdown measures, meant that returns from some sectors were compromised. By contrast, other sec- tors, for example, technology, provided growth and diversification opportunities for those investors with a good under- standing of where longer-term opportuni- ties may be found. For example, technology and digital stocks benefited as consumer behaviour shifted from physical shopping to online. Meanwhile, other sectors, par- ticularly hospitality, experienced substan- tial losses as a result of lockdowns and uncertainty surrounding the pandemic. As the UK emerges from lockdown, it remains to be seen what the enduring impact will be of these changes in con- sumer behaviour and the subsequent impact on investment in these sectors. For the most part, DC schemes have been relatively resilient during the pandemic, taking a pragmatic approach to invest- ment and volatility. While the landscape has now stabilised, we are now beginning to see the long-term effects of the crisis and schemes must reflect on their experi- ences of the last two years in order to build greater resilience for future crises.


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ISSN: 2045-3833 Issue 110 | February 2022 | portfolio institutional | 11


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