The coronavirus crisis should be used to evaluate how to make improvements to defined contribution investing to achieve better consumer outcomes, a fiduciary manager has said.
River and Mercantile Solutions said DC provision could be made better in a post-Covid world as recent market falls have shown low cost passive equity default arrangements have not fared well.
Niall Alexander, head of DC solutions at the firm, said for many DC schemes and master trusts, the race to the bottom on cost has meant investing in passive global equity strategies up to age 55 before derisking.
But these investments have suffered significant losses in recent weeks, proving these strategies need a re-think.
Mr Alexander said: “There remains a great disparity in DC schemes, from the length of the growth phase, the de-risking, to even the retirement target. Whilst investing in low-cost static solutions has for the last few years reaped benefits, markets have rarely been tested.”
According to the firm, as at the end of Q1 2020 global equity was down 20 per cent and at some points during the quarter it was down as much as 30 per cent.
Last month data from Moneyfacts 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.
The majority of these losses occurred in March, when the average pension fund fell in value by 11.6 per cent.
Mr Alexander said while this was not necessarily a problem for DC savers invested for the long term, it could cause significant problems for savers nearing retirement.
He said: “Some of the largest DC schemes, such as the master trusts, could well have had members retiring at age 55 whilst invested in its low cost, static, passive equity strategy default strategy that was yet to de-risk.
“These members would have seen their pension savings reduced by around 20 per cent over the quarter because of market falls.”
On the back of the crisis, Mr Alexander has called on schemes to review their default strategies.
He added: “In a post-Covid world, we expect many DC schemes and master trusts to consider their investment strategies a little more closely.
“Passive global equities, which served so well through most of the 2010s, has failed DC investors through Covid.”
Adviser views
But some advisers have disagreed saying focus should be on how DC schemes perform in the long-term and trustees should consistently review their default strategies, not just at the time of a crisis.
Darren Cooke, chartered financial planner at Red Circle Financial Planning, said: “People in DC pensions are generally long term investors so how a fund has performed over the last three months isn't entirely relevant, it is how it performs over 10, 20 or more years that counts.
“If a passive strategy delivers over those timescales by capturing more on the upside so what if it underperforms a little on the downside.”
Ricky Chan, director and chartered financial planner at IFS Wealth & Pensions, said: “Pension scheme trustees should be evaluating their investment strategies and value for money for the benefit of their members at all times anyway, not necessarily post-Covid-19, so I don’t quite understand the link given that the pandemic has affected almost every walk of life (and therefore economy & businesses around the world).
“Having said that, the post-Covid-19 world could look very different and members’ behaviours and attitudes may change, so trustees should start taking note and making more responsible investment options available, including ESG & sustainable investments.”
Meanwhile, Victor Sacks, IFA at VA Associates, said more schemes should turn to advisers to help with their strategies post-coronavirus.
Mr Sacks said: “There is a great opportunity for trustees, even directors of companies that have set up their group personal pension scheme using a default fund option, to reach out to financial advisers in general. Post pandemic world is going to be a different world in all aspects.”
amy.austin@ft.com
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