CoronavirusApr 30 2020

Market reaction has dented many pension pots

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Market reaction has dented many pension pots

Data from the latest Moneyfacts UK Personal Pension Trends Treasury report, showed the impact of the coronavirus pandemic on global stock markets had caused the average pension fund value to plummet by 15.2 per cent in Q1 2020, the worst quarterly performance on record, even surpassing the falls seen during the global financial crisis of 2008.

So it is not surprising when Steve Webb, partner at consultancy LCP, says the biggest investor reaction he has seen is fear of further falls.  

“Although those who sell up now are crystallising their losses, some people are so afraid of further losses that they would prefer to get out of the market now, purely, so that they can be certain of where they stand,” Mr Webb adds.

As a result, advisers are working many hours to reassure clients and maintain continued communication with their clients.

Market stress

Andrew Dixon, head of wealth planning at Kleinwort Hambros, says although he is not seeing clients looking to de-risk their portfolios, he acknowledges “it is still early days”.

Mr Dixon adds: “Every adviser needs to really understand their client’s objective. If you are a long-term investor with no need to draw on your investments, the conversation is likely to be different to a client who is living off their investment income. 

“Inevitably, clients will want to talk about markets and the impact of Covid-19 but we also need to be clear with clients. We cannot control markets. 

“I think more productive conversations are focused on reminding clients of their objectives and what adjustments, if any, are necessary to achieve them in the timeline set.” 

In the wake of this crisis, it is possible a risk-adverse group of investors may emerge, as the reality that the world is more fragile than we may have thought, kicks in. 

Tom Conner, director at Drewberry, says for advised clients, it is very common to build in market crash scenarios to stress test the likelihood of achieving future goals, so there is still concern but to a lesser extent.

“They key message advisers need to be communicating to their clients right now is not to panic,” he says.

Clients will want to talk about markets and the impact of Covid-19 but we also need to be clear with clients. We cannot control markets.--Mr Dixon

Mr Conner points to one of the worst FTSE crashes in history, Black Monday in October 1987, to illustrate his point.

“By the end of the year, the FTSE was actually up by 6 per cent over the previous year,” he adds.

“Moreover, if you zoom out even further, taking a 30 year-plus horizon, you’ll see that the same ‘record’ crash is actually barely a blip overall.”

Long-term thinking

Pete Glancy, head of pension policy at Scottish Widows, adds: “Short-term ups and downs are to be expected and are a reminder to keep a long-term view on your investments where possible. 

“We think of long-term investing as being ten years or more. Those considering making any changes to their pension should consider the implications of this carefully, bearing in mind their long-term objectives. 

“With a long-term investment such as a pension that is meant to help support people when they retire, any decision made now can have considerable impact years down the line.”

As the value of investments has been falling, the FCA announced a raft of measures to prevent market and consumer harm; one of these a relaxation of the 10 per cent depreciation reporting rules.

As noted by Maxine McIntyre, head of financial strategies at WPS Advisory, Mifid II requires firms providing portfolio management services or holding leveraged investment retail client accounts to inform investors where the value of the investments falls by 10 per cent or more compared to the last statement.

Notification is required for each subsequent 10 per cent. 

However, in the current highly volatile market this is a significant operational burden for firms and a potential source of additional anxiety and stress for clients. 

10 per cent depreciation rule

In response to this, the FCA has relaxed enforcement of this requirement until 1 October 2020. 

This easement applies where a firm:

  • Has issued at least one notification to retail clients informing them of a 10 per cent fall in the value of their investments;
  • Provides additional updates through public channels (such as a website, social media, non-personalised communications) which inform clients of current market conditions, how to check the value of their portfolios and to contact the firm if they require additional information;
  • Chooses to stop issuing 10 per cent depreciation reports to professional clients.
The key message advisers need to be communicating to their clients right now is not to panic.--Tom Conner

Ms McIntyre says although this easement will be welcomed by advisory firms providing portfolio management services via their discretionary permission, such firms should not lose sight of the duty to continue to provide updates to clients through non-personal means. 

She adds: “Advisers and their clients using mainstream providers or operating under a “Reliance on Others” arrangement with managed portfolio services or discretionary fund managers providers should be able to rely on them to deliver the appropriate information to clients, but should check the services that will be delivered and ensure they meet the needs of their clients.

“Advisers operating under an 'Agent as Client' agreement when using MPS or DFM should confirm the communication ownership with the provider. Don’t assume the provider will take responsibility for client communication. 

“This will depend on the wording of the terms of business that govern the relationship. In addition to the regulatory issues, getting this wrong will damage client relationships in such difficult times.”