At some point every year we all stop saying Happy New Year as the year is no longer new, it is simply the year.
At some point soon we will also stop saying that we are living in unprecedented times as to quote from Margaret Attwood’s, The Handmaid’s Tale: “this may not seem ordinary to you now, but after a time it will”.
Stock Markets around the world may not actually agree with that sentiment due the fact that despite crashes and recessions down the years, we have not seen times like these in living memory and so to be able to assess whether this is a temporary setback or the new normal is incredibly difficult because we simply have nothing to compare it to.
Markets have suffered though and are presently extremely volatile. The table below sets out the performance of the various sectors in 2020 thus far. This information was put together using performance figures to 1 April 2020; if you are reading this in one month time then it will have most likely changed substantially!
|Sector||% performance Q1 2020|
|ABI UK All Companies Index||-28.48%|
|ABI Global Equity Index||-17.25%|
|ABI Sterling Corporate Bond Index||-4.43%|
|ABI UK Direct Property Index||-1.78%|
|ABI Sterling Long Bond Index||+5.30%|
|ABI UK Index Linked Gilts||+4.17%|
Volatility has always had a strong correlation to risk and this can be seen all too clearly here. The growth assets have suffered badly in recent weeks whereas the more defensive assets have stood up reasonably well.
What does this mean for pension schemes?
For most arrangements there will clearly be an immediate negative impact if you compare the position today with that on say 1 February but we should remember again that pensions savings are a long term proposition and therefore the position today is not necessarily that important.
Defined Benefit Schemes
The biggest impact will be on schemes that have a triennial actuarial valuation due on or around 1 April 2020. The actuarial valuation provides a snapshot of the health of the fund at a given date, however these figures are used to assess what contributions need to be paid by the employer in the case of the liabilities being greater than the assets and therefore making this assessment on a date where the markets are significantly depressed can disproportionately skew the results and not in a good way.
However, schemes have 15 months to actually complete and sign off the valuation and if during that period the investment markets, as is hoped, dramatically improve, then consideration of this improvement can be taken into account in the ultimate assessment of deficit/surplus.
It is critical for trustees to remember that whilst today they are dealing with extremely difficult short-term conditions they should nevertheless be conscious that any decisions taken now should be consistent with their long-term strategy of securing member’s benefits and protecting the sustainability of their scheme.
This point has led to some trustees choosing to temporarily suspend issuing transfer values so as to ensure fairness to all members, as given the volatility of the markets at the present time it is difficult to be able to adequately provide a fair value calculation that can be guaranteed. Remember, fair value applies not just to the member transacting the transfer but also to the remaining members of the scheme who should not be made worse off as a result.
Defined Contribution Schemes
A well-considered lifestyle strategy within a defined contribution scheme should, by design, mitigate the worst of the falls in investment markets that we have seen lately.
We regularly read that the younger you are, the more risk you are able to take for the sole reason that you have time to make good any market falls throughout the rest of your career and savings span. This is of course true, however most schemes are designed in such a way that even at younger ages members are not exposed completely to stock market falls, or for that matter rises, through the use of multi-asset funds in the default arrangement.
For younger members these funds will be heavily tilted towards equities but they will include more defensive assets to provide an element of protection. As members age the proportion of return seeking and defensive assets gradually switches so that for older members they are much less exposed to the vagaries of the stock market and the falls that we have seen do not impact them in the same manner.
The message to these trustees and members is to not panic as your schemes should be designed to withstand these shocks.
Will the Markets recover?
This is crystal ball territory, although history tells us that given time markets always recover and whilst these are unprecedented times (there’s that phrase again!), we have no reason at the moment to think that this time will be different.
Global banks and governments are putting significant effort in to mitigating the short-term impacts of the virus. Many economic commentators believe that such action will protect the global economy in the medium to long term, whilst there may be some short-term pain.
At the present time the feeling appears to be whether the recovery will be “V” shaped or “U” shaped, with markets recovering quickly or taking time and not whether we are in an “L” shaped scenario where assets values are permanently reduced. This sentiment is based on previous highly unusual events as can be seen below:
Whether we are in the new normal will in time be seen, however the continued message to Trustees, Sponsors and Members is that this is not the time to make rash decisions.
We will be keeping you updated with regular updates. If you have any questions in the meantime, please contact your Ascot Lloyd consultant who will be happy to help.
Find out more
If you would like any more information on these matters, please contact your Ascot Lloyd consultant/contact directly.
Note: The content of this Pensions Briefing should not be deemed as advice. No section of this Pensions Briefing, reporting or data should be considered a client specific, or a personal client recommendation.
Advising on and arranging of occupational pension schemes is not regulated by the FCA. Arranging group personal pensions (GPP) and group stakeholder pensions (GSP) (which are not occupational pension schemes) may be deemed to be a regulated activity by the FCA once members start joining the scheme.