The disruption caused by the Covid-19 pandemic has also had a major impact on defined contribution schemes. In this article, XPS Pensions Group recommends trustees take four urgent steps to protect schemes and members.
The consultant said it is not only seeing significant disruption in the investment markets, there is the potential for disruption to pension scheme governance and members' decisions, including those in relation to retirement.
Its key recommendations to trustees are:
- Provide support to members who are approaching or considering retirement. They are particularly at risk due to their decisions often having ongoing effects.
- Monitor your scheme's investment performance and update your investment strategy. Schemes need to be mindful of the different groups of members in the scheme and how the market volatility will influence them.
- Monitor how schemes are engaging with members and issue clear, helpful communications.
- Consider the ongoing governance of the scheme - continue to talk with your advisors, the scheme sponsor and hold virtual trustee meetings.
XPS senior consultant Christopher Barnes noted: "Employers are also considering their contribution options, such as restructuring or changing these, and we are helping employers think this through. Also, many members are asking whether they could or should change their contribution rates or opt out of their schemes. These are both difficult topics, and all parties need to be careful of unintended consequences."
XPS senior investment consultant Alan Greenlees added: "It is likely that members will be concerned about how their pension pots have fared. For many members, the temptation will be to amend their investment strategy and revisit their retirement plans in the wake of these developments. The risk of members making major changes now is that this could further compound the issue and may not be in their best interests or aligned to their risk preferences".
A paper by XPS - Covid-19 and implications for DC Schemes - also reviewed the impact on key asset categories.
- Equities: Equity markets have borne the brunt of recent falls and have lost more than 25% of their value from the peak of only a few weeks ago. Members invested in equities will have experienced losses and may now be reliant on being long-term investors to recoup losses over what could be a material period of time.
- Corporate and Government Bonds: Against the backdrop of equity market turmoil, the value of bonds did increase initially, although recent losses have subsequently been felt. For members already drawing their pension in retirement, they may well hold these assets through flexible drawdown strategies. Their volatility is likely to have a direct impact on these individuals.
The price of annuities (which are purchased with an insurance company and provide a regular income stream in retirement) has increased over recent years. Those looking to purchase an annuity are currently seeing volatility in their prices, and hence the income they will receive.
- Property: The substantial economic uncertainty has placed constraints on the robustness of the independent valuation of assets such as property. This has led to many such funds suspending trading, which in turn will have affected members' ability to invest or withdraw monies from their funds. This is a particular problem for contributions (i.e. where they will be placed now instead of invested in the property fund?), retirements and transfers.
- Cash: The cut in the Bank of England base rate to 0.1% on 19 March saw it reach an all-time low. Many cash funds will now be delivering very modest levels of returns for members. Members may well be faced with the prospect of negative net returns, once inflation is taken into account.
