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The pandemic is the first market test of defined contribution investments since freedom and choice and even automatic enrolment were introduced, so what are trustees finding?
DC pensions are looking very different from 2007/08, when the global financial crisis hit. It is not just the fact that millions more workers now have one, but also how they are invested, and not least how trustees think about this.
One of the things trustees are considering at the moment is whether default glidepaths have worked as they should, said Dianne Day, client director at Independent Trustee Services. Speaking at a webinar organised by the DC Investment Forum on Thursday, she said most glidepaths derisk ahead of retirement. “One of the things we’re interested in is, did that work?” she said.
The ideal scenario would be for the assets of those close to retirement being protected in a falling market, and “by and large”, she said this has been the case, “but it’s been a design check, and ongoing design checks are quite important in DC”.
Moving forward, Day said there is good reason to review investment strategies and consider whether passive equities are still the best option.
“I’m really conscious particularly in equities that performance on a sector basis is really diverging,” she observed, referring to struggling industries like hospitality, retail, oil and travel, while others are doing well.
Day noted the way technology stocks have bounced back, and that pharmaceutical companies are also doing well. “Is this a time for active management? It's an interesting time for DC when we’ve got, at the same time, real cost pressures,” she said.
How much do you tell your members?
But investments alone don’t make for good outcomes, and contributions have been another big concern for schemes, including how to communicate with members to ensure they don’t take poor decisions.
“One of the main challenges for DC trustees is to decide how and whether to communicate with members,” she said. “Do you tell people not to panic? I don’t think that’s the right strategy because as soon as you say that, they panic.”
While opt-outs and contribution reductions might be less noticeable at larger schemes, many minimum contribution auto-enrolment vehicles delivering to small and micro employers have seen this kind of activity, warned Kim Gubler, director at KGC Associates.
Gubler highlighted recent research which showed that one in 10 over-55s had accessed their pension pot. “We really need to keep a watch on that as an industry, because it’s building up a larger societal problem,” she said.
Any reform of tax relief must not threaten contributions
Lower pension contributions as a result of the crisis are also seen as a key risk by Richard Butcher, managing director at trustee firm PTL. However, he saw the main threat coming from the Treasury.
“The UK is in the [middle] of a very deep recession. We had the largest setback we’ve ever seen by a country mile,” he noted, saying that it is therefore “inevitable that at some point, taxes will have to go up.
“One easy one is pension tax relief, because it’s largely invisible to the public,” he said.
Butcher added that he backs a reform of pensions tax relief, but that this should be done with a pensions not a Treasury objective.
“If they reform pensions tax with a view to getting more money into the Treasury, all they do is [get money out of the system], storing up problems for the day after,” he warned.
How has the pandemic impacted DC pensions in your view?