Understanding Pensions 2020

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tribution (DC) pension schemes are address- ing pension industry challenges of concen- tration of assets by ramping up the breadth of what they invest in, going beyond equi- ties, bonds and property, and bringing in private equity and infrastructure. Diversification protected DC investors during the COVID crash. While the FTSE100 fell 34 per cent between January 1 and the market low of March 24, workplace pension schemes suffered much lower drops. Analy- sis of seven of the UK's biggest master trust pension schemes by industry publication Corporate Adviser shows younger savers, those with 30 years to retirement, experi- enced drops of 20 per cent over the period. The process of lifestyling, where older savers are moved into less risky assets to protect them against market shocks as they approach retirement age, delivered even more downside protection. The aver- 1259699 - Times newspaper banner ad A/W.indd 1 14/09/2020 13:08 8 age older saver's pot fell just 4.2 per cent over that period. Diversification and life- styling have been key to addressing these pension industry challenges. Robert Cochran, senior corporate pen- sion specialist at Scottish Widows, says investors generally responded calmly to the stock market turmoil and trust in the sys- tem has largely been maintained. "When the stock market tumbled, we saw a big spike in customers looking to switch out of their funds to more secure options," he says. "Had they done so they would have locked in their losses and missed out on the rebound. Because pension providers are getting better at communicating digitally with customers, we were able to success- fully explain why volatility is not necessar- ily a bad thing for long-term savers and the majority stayed invested." That decision to stay put has turned out to be the right one. The rebound in markets has seen the great majority of DC pension funds recover all their COVID-crash losses, with the average workplace scheme deliv- ering a positive return for younger savers of 0.9 per cent in the year to June 30. Older savers, within a year of state pension age, registered a positive return of 2.8 per cent. Mark Futcher, a partner at pensions consultancy Barnett Waddingham, says: "The big message during the stock mar- ket turmoil was to provide reassurance that the strategies in place were designed to cater for precisely this sort of volatil- ity. The industry beefed up its messag- ing around this and was largely success- ful; scheme members and employers were broadly reassured. Reassurance and calm in uncertain times What impact have so-called black swan events such as a global pandemic had on public trust in investment strategies of the pensions industry? hen pensions make newspaper headlines it is almost always for negative reasons. The massive stock market losses of the COVID crash, which saw the FTSE100 lose around a third of its value over the first three months of 2020, have been no different. So how has this latest shock to the system influenced attitudes to pensions and how have mar- ket players adapted in meeting that most important of all pension industry chal- lenges of maintaining public trust? Pension providers are adopting increas- ingly sophisticated risk management strat- egies to protect savers from the worst of stock market falls and preserve that hard- earned public confidence. The coronavirus pandemic is the latest in a series of black swan events, unforeseen cataclysmic events that create stock market turmoil and have huge repercussions for the value of assets within pension schemes. Richard Butcher, chair of the Pensions and Lifetime Savings Association, says: "I sense there are probably more big risk factors now, the increasingly violent reac- tions of the weather and climate change, feeding into the migration crisis and broader environmental issues. "Historically no one has been good at modelling risk successfully, but pension professionals are now pricing in risks we can't anticipate. We can't put names on these risks because we don't know what they are. But we can model the impact of extreme scenarios on investment portfolios." Diversification, also known as not put- ting all your eggs into one basket, has been around as a concept for years. Defined con- Marianne Curphey Award-winning financial writer, blogger and columnist writing for various publications, and former staff at The Guardian and The Times. Pádraig Floyd Financial writer, former editor- in-chief of the UK pensions and investment group at the Financial Times and ex-editor of Pensions Management. Stephanie Hawthorne Pensions, law and investment journalist, former editor of Pensions World and regular contributor to the FT's Pensions Expert. Marina Gerner Award-winning arts, philosophy and finance writer, contributing to The Economist's 1843, The Times Literary Supplement and Standpoint. John Greenwood Editor of Corporate Adviser and www.capa-data.com, former deputy personal finance editor at The Sunday Telegraph and author of the FT Guide to Pensions and Wealth in Retirement. Alec Marsh Author and writer, editor-at-large of Spear's magazine, with bylines in The Guardian, Spectator and New Statesman. "At the same time schemes also made it easy for members to temporarily stop their contributions if necessary, recog- nising that some households might be struggling financially." Andrew Cheseldine, chair of the board of trustees of the Smart Pension Master Trust, adds: "Markets fell significantly and they bounced back pretty quickly. Lifestyling did its job for older savers. And even if there hadn't been an immedi- ate rebound, for those with 20 or 30 years until retirement, it doesn't matter if the market drops. Falling markets are actu- ally an opportunity for long-term savers to buy assets cheaply." Pension industry challenges in the area of defined benefit (DB) schemes are different. Some schemes have become more precarious as the assets held within them have fallen in value. Legal & Gen- eral Investment Management's DB Health Tracker index, which ref lects schemes' asset to liability ratio, the demographic risks in the scheme and the likelihood of the sponsoring company becoming insolvent, showed the average DB scheme could expect to pay 91.4 per cent of mem- bers' benefits at March 31, down from 96.5 per cent at the end of 2019. But by June 30, some ground had been clawed back, with the index rising to 93.5 per cent. Cheseldine says: "There are many well-funded schemes out there with the resources to weather the storm. But in struggling sectors, such as aviation, retail and hospitality, there may be schemes whose sponsoring employer goes under and it seems inevitable these will end up in the Pension Protection Fund." However, no high-profile schemes have fallen over yet and trust in DB schemes has not been eroded so far, say experts. Climate change is seen by the govern- ment as one of the greatest of pension industry challenges. New regulations force both DB and DC schemes to chal- lenge long-term investment risk, by mak- ing them evidence the science behind their investment decision-making, par- ticularly in relation to environmental, social and governance factors, with a spe- cific focus on climate change. Industry experts say it is too early to say whether this latest in a series of seemingly increasingly frequent "once-in-a-lifetime" events will change attitudes to retirement. But they do report a longer-term trend towards pensions becoming just a part of a bigger, broader retirement plan. Cheseldine concludes: "This trend will continue to be driven by the tighter restric- tions on the amount you can pay into your pension. Interest in ISAs (individual savings accounts), particularly the Lifetime ISA, is growing, both among employers and mem- bers of the public. And for many people, resi- dential property, whether their own home or buy to let is increasingly seen as part of their retirement plans." Distributed in Publishing managers Flavia Brown Frank Monaghan Deputy editor Francesca Cassidy Head of production Hannah Smallman Design Sara Gelfgren Kellie Jerrard Harry Lewis-Irlam Celina Lucey Colm McDermott Samuele Motta Jack Woolrich Managing editor Benjamin Chiou Associate editor Peter Archer Published in association with Although this publication is funded through advertising and sponsorship, all editorial is without bias and sponsored features are clearly labelled. For an upcoming schedule, partnership inquiries or feedback, please call +44 (0)20 8616 7400 or e-mail info@raconteur.net. Raconteur is a leading publisher of special-interest content and research. Its pub- lications and articles cover a wide range of topics, including business, finance, sustainability, healthcare, lifestyle and technology. Raconteur special reports are published exclu- sively in The Times and The Sunday Times as well as online at raconteur.net. The information contained in this publication has been obtained from sources the Proprietors believe to be correct. However, no legal liability can be accepted for any errors. No part of this publication may be reproduced with- out the prior consent of the Publisher. © Raconteur Media /understanding-pensions-2020 @raconteur /raconteur.net @raconteur_london UNDERSTANDING PENSIONS A P A T H Y V A C T I V I S M M A K I N G A N I M P A C T A G E I N G P O P U L A T I O N S Many don't actively manage their investments, but does apathy hinder or help providers? Outlining eight key ways in which the public can make their pensions more ESG-friendly One in six people will be over the age of 65 by 2050, so how will this impact pensions? 02 04 08 raconteur.net John Greenwood W Contributors Opinium Research 2020 Moneyfacts/Raconteur analysis 2020 HOW CORONAVIRUS HAS AFFEC TED INVES TMENT BEHAVIOUR Survey of UK investors at the start of lockdown about personal finances and investments: respondents could select multiple answers PENSIONS RECOVER GROUND Returns for average UK pension funds and the FTSE 100 in the first and second quarter of 2020 Remain invested I am invested for the long term Remain invested but will redeem or switch if the situation gets any worse Redeem but look to re-invest in the future Switch I have/will move my money into an alternative fund Don't know/ not sure Move to cash I have/will move my money into cash until I am more confident Redeem I am not comfortable with losing money on my investments Other The big message was to provide reassurance that the strategies in place were designed to cater for this sort of volatility I N D E P E N D E N T P U B L I C A T I O N B Y 2 7/ 0 9/ 2 0 2 0 # 0 6 9 0 R A C O N T E U R . N E T F I N A N C I A L M A R K E T S Art director Joanna Bird Digital content executive Taryn Brickner Design director Tim Whitlock Q1 Q2 Pension funds FTSE 100 −15.2% 13.3% −24.8% 8.8% 43% 19% 12% 11% 10% 8% 23% 2% Rachael Revesz Freelance journalist and commissioning editor, specialising in finance and women's rights. DISCLAIMER: Content in this publication should not be used as financial advice; please ensure you always seek the help of a qualified financial professional

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