You will have seen that investment markets have been volatile as a result of the Coronavirus outbreak, with a significant fall in market values of equities last Monday.
However, it's important to remember that pension investments are long-term and I would encourage you and your scheme members to read our top tips for dealing with a volatile market (released in 2019).
Coronavirus spread main risks
Companies may struggle to meet demand which could cause a ‘supply shock’ that will be felt in the global markets.
Increased market volatility and a sharp fall in shares, property and commodity prices.
Impact on DC members
Younger members: global equity returns over longer time periods have been strong which means that those exposed to equity markets for longer periods are still likely to be better off than those with less exposure to the asset class, despite the recent falls. The short-term market fall offers buying opportunities (pound cost averaging) for members’ contributions.
However, at younger ages members are seeking long term returns and so this does not necessarily mean the investment strategy is incorrect. This does highlight the need to ensure that your default investment strategy has an appropriate level of risk for your membership and the importance of diversification in an investment portfolio.
Older members: the market fall will be of most concern to members closer to taking their benefits, where preserving the value of their fund is more important, and for those drawing on their fund. Those adopting a well-diversified investment approach are likely to have limited the extent of market falls. Again, this highlights the importance of having an appropriate investment strategy for your workforce/membership.
For members with long-term focus, remaining invested in the market and continuing to invest contributions is the most sensible approach. However, you may wish to communicate with your membership as any drops in fund value may cause knee jerk reactions, such as opting out or changing investment strategies (crystallising the member’s loss). This is likely to be particularly important if the members' annual benefit statements are issued over the coming months. Please do let me know if you would like our support in communicating this topic to members.
For those members closer to retirement the market conditions could have a more significant impact. You may wish to communicate with these members to remind them of the options available to them.
We have had very strong investment markets in recent years, however the current volatility in the market highlights how important it is to review your default investment strategy. We would encourage you to regularly (at least annually) review the performance of the funds in the default investment strategy and review the strategy once every three years.
Please get in touch if you would like to discuss the investment strategy for your pension arrangement further.