The latest from our Scottish consultancy team, based in The Capital Building on Edinburgh's St Andrew Square

It’s fair to say that many members of Defined Contribution pension schemes, where members bear the investment risk and return, watched with serious concern as their pension pots tumbled over a handful of weeks in mid-February 2020 so that by the end of March they were worth roughly 75% of their pre-COVID driven market drop.

The speed of market drop was unprecedented in terms of market shocks as can be seen from the following:

the great recovery blog market drop graphSource: VOXEU

The chart compares the drop of the S&P 500 index during the dot-com crisis (which peaked on 24 March 2000), the subprime crisis (peaked on 9 October 2007) and the COVID-19 crisis (peaked on 19 February 2020). In March 2020, it took only one month for the S&P 500 to lose one-third of its value, while it took one year for the subprime crisis to decline the same amount, and 18 months for the dotcom bust.

The pace of last year’s market decline was only outdone by the lightning quick action of the fiscal response of the U.S. Federal reserve (the FED), who took a mere 2 weeks to cut interest rates to zero – compare that reaction again to the subprime crisis of 2007/08, when the FED took 15 months to execute the same interest rate cut.

With history not offering any warning, few would have been able to anticipate the subsequent market upturn driven by that Central Bank fiscal policy and stimulus which the chart also shows, with S&P500 almost back at its pre drop peak 3 months after its dramatic fall from the COVID crisis.

Turning to how this performance affected workplace DC default funds, all of which are constructed differently with a range of risk and return metrics, the scenarios a year down the line show clearly how those performance differences feed through to members:

Fund performance to 31 March 2021:

The great recovery blog fund performance graph

Looking more closely at the risk and return attributes shows more clearly how each strategy turned risk taken into return:

The great recovery blog risk return graph

So, although a higher return is desirable to boost members’ eventual retirement outcomes, this should be balanced with taking an appropriate level of risk. It’s also fair to say providers are evolving their offerings on an ongoing basis, particularly around the aspect of their strategies’ Environmental, Social and Governance (ESG) attributes, and with the Leaders’ Summit on Climate taking place (April 22nd) that is more important than ever in helping deliver the best outcomes for your members.

If you’d like to understand more about your DC scheme’s default investment strategy, whether members (your employees) are getting good returns at an acceptable level of risk and with enough emphasis on ESG considerations, please get in touch with us as we’re always happy to discuss these issues:

Posted by Nick Frankland

Topics: Workplace Savings, Pensions, Edinburgh


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