The Covid crash was the test that pension funds didn’t want – at least not yet. It has proved an examination of the pensions sector on so many levels.
Most fundamentally it has challenged fund performance and the idea of lifestyling, which has become such an important part of default auto-enrolled pension schemes. This has worked effectively in schemes such as Nest, where younger savers suffered falls of 17 per cent, but older savers actually saw gains. But in other types of guaranteed, protected or target funds, the effectiveness has not been so transparent, even though many have as much as 25 per cent moved in to cash, ready for savers to take a lump sum.
But some have otherwise left far too much exposure to equities when savers are just a few years out from retirement. This concept needs examining, and there is an onus on trustees who put members in to target-dated or lifestyled funds to make sure that they are doing what savers expect of them.
It may be boring, and it may require explanation sometimes about why those reaching retirement age have missed out on a bull market, but that is easier to manage than savers who see their retirement plans smashed apart.
The 11-year bull run was always going to end, though of course no-one predicted it could have happened as spectacularly as this. That doesn’t mean that schemes should not have planned for the worst – it usually does happen. The Covid crash has also proved a test of communication, and at the most stark level shown up the stupidity, or perhaps the futility, of the Mifid 2 directive that forced wealth managers and some other savings plans to disclose falls of 10 per cent – and then have to follow it up with a second email to members just days later when the market continued to fall.
What were savers supposed to do with this information? The only possible reaction I can see is that many would have panicked and taken rash action, which would largely have been crystallising losses. The messages are nudging pension savers in to the wrong type of behaviour, particularly as they don’t also text when the fund has risen by 10 per cent.
That would let members know that they were doing the right thing. This negative messaging also undermines confidence in the industry.
Schemes should have been vocal during the crash – and I know some that were. But those that stayed silent should have considered what message this sent to members, who were worrying. They needed reassurance.
The crisis has also put to the test pension regulations, and it was about time too. Layer after layer of red tape has been mounted on to the industry over the years, which has made it confusing to the public and unnecessarily restrictive.
It was hardly surprising then that in the immediate aftermath of the crash we heard calls for DB schemes to be allowed pension holidays in order to meet payments for other areas of the business, effectively allowing their deficits to grow.
In some corners there were calls for smaller employers to be able to waive auto-enrolment contributions. I’m not supportive of either of these, mainly because pension contributions have to be viewed as part of an overall pay package, rather than an additional bonus that can be dropped at will.
The crash has also been a test of the pension freedom rules and whether savers took too much, or too little risk. I am more sympathetic to calls for the Money Purchase Annual Allowance to be increased, if only to allow those who have seen their savings wiped out by the crash the chance to earn more money and contribute more in to their pension. While the purpose of this rule is to stop recycling of reliefs, it has always been cumbersome.
The crisis also did a neat job of highlighting the crippling inflexibility of some DB schemes, particularly in the public sector, in that it required emergency legislation to allow retired nurses and doctors to return to work.
All of these things have proved a test of the management of schemes, the choices made by trustees, the decisions of fund managers, and the rules imposed by regulators, the Treasury and HMRC.
We’ve already seen a bonfire of red tape by the Government as it tries to streamline processes to manage the economic and health crisis that has hit the nation.
When we emerge from this darkness of this crisis, every scheme should sit back and reflect on how they served their members during one of the most challenging periods for this country.