Just over three months ago, investment markets saw a dramatic downturn due to the outbreak of coronavirus and the perceived effect lockdown would have on the global economy. This will have been highlighted to employees by a fall in the value of their Workplace Pensions and many may now be wondering what’s changed in the markets and how it’s affected their pension outlook.
Firstly, the fall in the markets back in March was caused by business-as-usual being disrupted on a global scale, and fears for the effect it would have on the earnings and share prices of companies around the world. Central Banks (such as the Bank of England and the US Federal Reserve) took sweeping actions to pump money back into the system, while governments announced huge relief packages. By mid-June, many global equity/share markets have returned close to where they were before the “Covid crash”, although in the UK, the FTSE 100 hasn’t recovered as strongly yet and the economic outlook remains one of concern.
Part of the reason for this, is that economic experts (including the investment managers within most pension companies) at first predicted a “V-shaped” recovery – a sharp decline followed by a sharp upswing. Now the common view from those same experts is that the recovery will be more “U-shaped” – that is, a sharp decline, followed by a long trough, before gradually starting to move up again.
These are still challenging times, and it’s thought the recent improvement in share values is not in line with the economic reality facing us over the next few months; however, it has shown that a long-term investment mind-set remains crucial. Market reactions are often short-term and emotional, whether based on fear or optimism. For that very reason, share prices often reflect what professional investors think might happen in the future, rather than what is happening right now. That’s why it’s so important for employees to keep focused on long-term goals for their retirement, rather than day-to-day or month-to-month fluctuations in the markets.
It’s difficult to see the value of any investment fluctuate so drastically, but it’s perhaps even harder for those who are new to Workplace Pensions and not seen this before. It’s worth noting however, through previous declines and periods of uncertainty, yes the stock market has dropped, but it has subsequently recovered over the longer term. And while the Covid crisis isn’t over yet, there’s no reason to think that share prices won’t eventually recover and begin to grow again. While past performance can’t be relied on to predict the future, it’s hoped that this current crisis will be a painful but relatively short period of struggle.
The table below* gives a look back at the historical performance of share markets demonstrating their recovery. Although no one knows when that will happen now, considering events like the Iraq War, the Afghanistan War and the Global Financial Crisis, over the long-term when there has been a significant drop in the market, there is still opportunity for growth:
Fidelius review the group pension market on a regular basis to ensure that each provider is financially stable and that the funds under management are performing in line with the rest of the market. In addition, the default fund that most employees are invested in is ‘lifestyled’. This means that investments automatically move into more secure funds as individuals get closer to retirement, meaning there is an extra level of protection should there be such a fall in markets when someone is close to accessing benefits.
*Scottish Widows, June 2020