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DC pensions through the pandemic

The defined contribution (DC) market has been resilient during pandemic, but there are likely longer-term impacts that will need to be closely tracked and measured, the Pensions Policy Institute (PPI) says.

The research organisation's 2021 DC Future Book - its annual report on DC workplace pensions - shows schemes are in a strong position despite the initial shocks of Covid.

The book - published today (23 September) in association with Columbia Threadneedle Investments - considered the heavy impact of Covid-19 on the DC market, as well as the various opportunities it had provided on the investment side.

PPI senior policy manager Lauren Wilkinson said 2020 had been "a continuation of positive trends" associated with auto-enrolment (AE), with around 13.7 million active members currently in DC workplace schemes - 10.5 million of which are automatically enrolled, up from 9.8 million in 2020.

Aggregate DC assets have grown from £471bn in 2020 to £490bn in 2021, with the median DC pot size standing at only £11,400 - an increase of £1,800 between 2019 and 2020.

The last year saw lower numbers of savers access pension products, as well as a shift from savers in viewing DC through a more long-term lens.

The number of pots accessed in 2020 decreased from 433,000 in 2019 to 277,500 in 2020, which the PPI attributed to this caution from savers. Perhaps the effects of covid.

But Wilkinson warned the long-term impacts on investment, employment policy and individual behaviours will arise from the pandemic have not yet been seen. She noted some schemes had seen opt out rates increase - notably at Nest, which had a three percentage point increase - in the first six months of the pandemic.

However, Wilkinson noted there had been "no significant changes in average contributions levels" across the board in the last 18 months.

"Governments and employers are still in the process of developing plans for economic recovery," Wilkinson said. "This may all impact more on taxation, employment, and wage growth, all of which have the potential to negatively affect the affordability of investment while the stock market is volatile."

Saver caution

Wilkinson said savers had shied away from "cliff edge decisions" over the last 12 months, thanks in large part to the economic uncertainty caused by Covid.

Savers were cautious about accessing DC pots during the last year - 134,500 savers undertook full cash lump sum withdrawals, while 94,000 accessed pensions via drawdown.

The full cash lump sum withdrawal figure is a decrease of nearly half on 2019 figures.

Wilkinson said the use of income drawdown was "fairly consistent" between 2010 and 2014, with around 20,000 new contracts being purchased each year. Sales which then almost doubled after the introduction of pension freedoms grew to 216,000 in 2019, but also saw a significant decline last year, with 94,000 sales for 2020.

On the annuity side, the PPI observed a much sharper decline in sales in 2020, with less than 50,000 sold over the course of the year.

Post-pandemic lessons

Wilkinson said the pandemic "has been a challenging and uncertain time", adding: "Covid-19 is likely to accelerate some investment trends - making evaluation and implementation of some trends easier - while also complicating others".

The most obvious investment impact highlighted by the PPI during the pandemic was an "exceptionally high" dispersion of returns among various asset classes.

"The UK stock market alongside stock markets around the world experienced significant falls and volatility," Wilkinson said.

"While DC schemes in general have long-term investment horizons for individual savers near to or in retirement, their savings have a shorter period in which to recover from asset price declines compared to younger savers before they make withdrawals, which act to crystallise those investment losses. We've seen with the savers being cautious and accessing their DC savings."

Wilkinson added that the "extreme volatility" experienced in 2020 was "mitigated for DC savers" - those still in lifestyle funds - because investments would have followed a pre-defined pathway "away from riskier assets like equities into more stable assets such as bonds".

"This means that pot sizes will not have been as severely impact as declines in global equity markets," she explained. "Savers could benefit from delaying access to their pension pot as long as possible to give it as much time to recover as much as possible, as well as making additional contributions."

But in practice, Wilkinson acknowledged this option was more challenging for some circumstances that others.

"Those with lower incomes, heath issues, or disabilities would find it harder to delay as they have a greater need to retire from work."

Schemes holding back

The PPI found that many DC schemes did not make significant changes during the pandemic, focussing instead on protection savers' capital.

"All this uncertainty and volatility associated with the pandemic did encourage many to review their portfolio to ensure risks and opportunities presented by the pandemic were appropriately accounted for, and to mitigate the negative impact. However, the nature of uncertainty meant that many chose not to take any immediate action in relation to their asset allocations," Wilkinson said.

Schemes have also been increasingly focused on ESG and in particularly, themes of social governance that have emerged as a result of the pandemic.

Wilkinson said Covid-19 had accelerated both the pace and nature of sustainable finance.  

"The Covid crisis has placed a spotlight of schemes' social policies towards key stakeholders, including employees, suppliers, and customers, and the pandemic has emphasised practices that may have been previously overlooked," she said.

Investment focus

Columbia Threadneedle Investments global head of asset allocation Toby Nangle said Covid had changed the conversation on investment trends, with active versus passive debate "all but over".

"There seems to be a general consensus now that low-cost passive outperforms expensive active," he said. "But active does have a strong role in boosting DC pension pots over the next decade."

Columbia Threadneedle Investments client relationship director Andrew Brown said he now saw "a need for greater sophistication of investment strategies" across the DC landscape moving forward as the economy continue to remain complex.

"If we look at the UK pensions landscape today, I think most people are well aware that the potential inadequacy of future pension provision is fast becoming one of the biggest socio economic challenges facing the UK," he said. "We are lagging in terms adequacy and we cannot simply rely on increasing material contributions at punitive levels. Advanced investment thinking can and should play a far greater role."

He explained: "DC schemes can take advantage of positive cash flows and very long investment times to access a wider range of risk premia, and embrace tangible asset classes that have the additional benefit of engaging members. This can only be achieved by advancing investment governance and innovative thinking towards leading edge, defined benefit standards, but from DC decision makers."

Brown said it was fortunate for the DC market that the advent of AE had coincided with "unusually strong" equity markets over the last decade.

"And over the past 18 months, the quick action of governments and central banks helped the world avoid a global calamity and many risk assets and even equities bounced back with unparalleled speed.

"Given pension schemes are long-term, DC savers have emerged from the depths of the pandemic relatively unscathed."

Wilkinson noted the pandemic had also "presented opportunities for investment" alongside the uncertainty it had brought to the market.

"Consecutive lockdown measures meant the returns from some economic sectors were compromised but in contrast, other sector might have growth and diversification opportunities for those investors that have good understanding of where longer-term opportunities may be found," she said.

"This is an area where, again, it remains to be seen whether the opportunities will slip in the long-term."

Future outlook 

Overall, assuming current trends continue, the PPI estimates there will be 15 million active DC savers by 2041.

The institute also expects DC assets to grow to around £995bn and median DC pension pots to grow to around £36,000.

Columbia Threadneedle Investments EMEA head of distribution Michaela Collet Jackson concluded: "While the Covid-19 pandemic has had a major impact on societies and economies, it did not halt positive trends we have been seeing in the UK DC market for some time.

"However, this is not a time the time for complacency. A prolonged market downturn could have resulted in a far worse outcome for DC scheme members and their nest eggs. We encourage all pension trustees to use the experience of Covid-19 as an opportunity to work even more closely with their advisers and asset managers to assess the resilience of their schemes' default funds."

 

Based on an article published by professional pensions.com on 24/9/2021

FOR INVESTMENT ADVICE REGARDING YOUR PENSION OR OTHER INVESTMENTS PLEASE CONTACT Elliott Wilson ACSI DipPFS AF3

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