The impact of Covid-19
We have quickly become used to the new lexicon of Covid-19 that we deal with every day, epidemiology, viral load, pandemic, and closer to home for us in pensions, furlough and all in such a short space of time. Pension savings have not been left out of that. There is a lot of focus on the immediate mark down in asset values but perhaps of longer lasting importance on people’s savings will be the reduction in people working and saving regularly for their pensions.
How should we think and act about the impact of Covid-19?
When we as pension providers think about building investment strategies for pension plans, we anticipate that there will be shocks to the system. When those events hit they are still a shock and no matter how much we plan and anticipate, they are always different from the last and by definition not anticipated. We’re actually quite good as an industry and the broader financial system at preventing the same thing causing a shock again. At all points we know that there could be a shock but we have no idea when, how big they will be and how long they will last.
But there are some positives that we can take from the way this event has been managed. The financial system has barely missed a beat. Stocks are traded and members can access their funds. The industry has had some problems with the UK property fund sector as some funds are suspended as they can’t ascribe a fair value for investors so they have been suspended by the managers. From a system wide perspective, so far and crossed fingers, the wheels have remained on the road.
Thinking about the effect on members investments there is clearly an impact on every member’s savings journey. Investment shocks are explicitly built into the models we use to design member de-risking lifecycles. The long duration of younger members investment horizon allows them to take higher levels of investment risk in the expectation that this will deliver good returns over time, even after taking investment shocks. As members get older we take some of that risk off the table so that they are less exposed by using a range of different assets to diversify. Today with the majority of DC members expected to use drawdown in retirement where they will be relying on return seeking assets for another, say, 10-15 years after retirement the time horizon and capacity for individual pension savers to cope with risk is longer than ever.
Serving member needs
All businesses are affected by the impact and are having to adapt to new ways of working and pensions is no exception to this.
Speaking from our own experience, our business interruption planning has been very successful. We are now all working remotely so our business activity is able to continue. In the very early days some of our SLAs declined and some short term backlogs built up, but we remained open and have now largely cleared any backlogs and SLAs have returned to the 95%+ levels that we would normally see. This is a great tribute to the teams involved and the resilience planning that has been baked into our business continuity plans.
The teams are focussing on making sure that the key activities which are around paying member benefits are maintained at times of stress. Our members can self-serve almost all of the actions that they might want and this has stood us in very good stead in providing excellent service to members in these resource challenged times.
What to say to members about the investment impact
When we think about how we should communicate about the investment implication to members it’s important not to assume that they are all the same. Many will be defaulters who have never and will never want to make any decisions. Smaller numbers will be at the opposite extreme and have their own strategies and implement those through self-selecting investments. Clearly different members have differing levels of engagement and involvement in the investment process and different messages are needed for both, so the ability to segment member communication will pay dividends. We must remember that the biggest group by far is the defaulters who won’t make a decision, but may be concerned, so what we need to communicate to them is mainly reassurance. The sort of messages for them look like this:
- Pensions are generally long-term investments
- Although the cause and speed of the recent market falls and the spike in volatility were somewhat extraordinary, the magnitude of the falls have not been etraordinary, and should be seen in the context of a long bull-run over the past few years as well as where members are in their journey
- The lifecycles/defaults are designed to be robust to market events such as this:
- with more risk being taken in the early years when members have substantial years and contributions in front of them – for such members, note that future contributions will be invested at lower points in the market cycle, hence could end up being good news as long as markets eventually recover
- with risk being gradually reduced as members get closer to retirement age and beyond
Self-selectors need to be reminded that they are in charge of their own selection and that we can support them with the choices we make available and in ensuring that we execute any trades they may have efficiently.
There is also a need to communicate at the right time and in the right way to members. It needs to be clear, factual and precise. It needs to be relevant and to the point, without unnecessary or confusing detail, with clear direction to where they can find additional information if they want it. We should focus on doing what we do as well as we can, making sure that when the member needs information it is readily available for them and that we are able to acknowledge their fears and concerns and can give them what they want when they want it.
Encouraging appropriate member behaviour
Appropriate actions for members to take as a result of the communication will be personal and dependent on the position in their savings journey, but will likely include:
- A review of pensions savings, contributions, retirement planning and drawdowns
- Members who are in the savings phase should ideally keep up their contributions and maybe even increase them subject to affordability, given they will be invested at relatively depressed market levels
- Members who are close to retirement may want to consider the specific impact on their savings and review the timing of their retirement plans
- Members who are in drawdown may want to consider the specific impact on their savings and review the timing of any drawdowns they make
Having a self-serve-portal for members to intuitively take these actions are the ways we, as product providers, can encourage ‘good’ behaviour by members.
There’s no getting away from the difficulties these uncertain times bring the industry and our members, but setting out key objectives for ourselves and our member support, like we would at any other time, should help keep us all on track.