A greener approach to pensions and investment
Getting home from work one night during the 2007-8 global banking crisis, Nigel Peaple was greeted by the sight of the annual statement from his pension provider. Tearing open the envelope to find out how his funds had performed during the previous 12 months, he stared in horror at the numbers.
“I was like – whoa! – the value of my pension has gone down by 25 per cent in a year,” remembers the director of policy at the Pensions & Lifetime Savings Association. “Happily, a couple of years further on, it was all fine again.”
His experience will be reassuring for anyone receiving their annual statement over the past few months. While stock markets plunged, shredding the value of savers’ pension funds, they’ve since staged a remarkable rebound, regaining much of the ground they lost due to Covid-19 far quicker than during the great financial crash.
“Looking at the big picture, the great thing about pensions is that they’re really long term,” Peaple says. “Quite frankly, in economic history, these are short-term economic blips and hopefully, in a year or two there’ll be a vaccine and the economy will move on.”
Emily Pike, a private client lawyer at Womble Bond Dickinson, agrees: “Many clients had already ridden many crises of different natures. They viewed [the pandemic] as another hiccup in the market, another crisis to overcome. I’m not minimising it in any sense, but it was important to stay calm and take a long-term view.”
Peaple stresses that cash stored in a pension is locked away until the saver reaches at least the age of 55, removing the temptation to take money out in a panic. Younger pension scheme members can ride out economic storms, whether caused by banking crises or by pandemics.
For older pension scheme members approaching retirement, the fall in share prices during the spring may have felt far more threatening. But Peaple points to the options provided by the “pension freedoms” introduced in 2015 by the government.
Previously, savers would use their pension pot to buy an annuity – a guaranteed income for the rest of their lives. Pension freedoms introduced the option of “drawdown” products; in effect, the saver could take money from their pension fund – or “draw it down” – and then leave the rest invested in stocks and shares, bonds, and other financial instruments until they wanted it.
In the face of the pandemic, the pension freedoms gave older savers the option of holding off and leaving their pensions invested – as long as they still had a job and didn’t need the income from their pension straightaway.
Savers were in more control than they were during the aftermath of the banking crisis.
Pike thinks investors could become more active as a result of the pandemic. She says: “We might see a move away from passive investing towards a greater interest in where money is going. People might have some ESG [environment, social and governance] criteria of their own which they want investment managers to follow.
“There are more discussions around tree planting, carbon sequestration and environmental issues – that’s coming into most conversations. This is definitely a trend we’ll see continue and it’s an absolute necessity for some investors. It’s not just about profits but a real desire to do good.”
Looking to a time after the pandemic, Peaple thinks people’s experiences during the lockdown may change the UK government’s attitude towards encouraging the public to save for a rainy day.
“Governments have, quite rightly, stepped in with policies, such as auto-enrolment in pensions, to get people saving for retirement,” he says. “This pandemic is making government much more aware of the fact that people also don’t have a short-term, rainy-day savings pot.
“I wouldn’t be surprised if the next government move isn’t to try and guide people towards having a pot, so they are financially resilient by having three or six months of savings in a readily-accessible location.
“Nothing concrete has been proposed yet, but there’s talk of having savings going first into a rainy-day savings pot and then on to a pension.”
Peaple continues: “If you’re in work then maybe you’ll have 5 per cent going off into your pension pot and then 1 per cent going into a savings pot, so it’s done automatically for you. Some big employers already provide that kind of support to their staff.”
The pandemic has painted a mixed picture when it comes to savings – workers who were on furlough and believed they would return to a secure job were able to save more because there were fewer opportunities to spend.
The latest data from trade body UK Finance showed total savings deposits rose by 5 per cent between April and June this year to more than £900 billion.
Yet surveys during lockdown found a majority of workers voicing worries that they didn’t have any savings on which to fall back if they lost their jobs – anywhere up to three-quarters of those questioned, according to research by Opinium and Smarterly.
Whether it’s through choosing to save or being encouraged to save by government measures, a return to having a rainy-day fund could be one of the longer-term impacts of the coronavirus pandemic.
Taking stock of what sectors are coping well
Carol Clark, senior client portfolio manager at Aberdeen Standard Capital, offers market insights:
Which sectors have performed well on stock markets during the pandemic?
Technology has been the clear winner globally, as the pandemic accelerated changes in the way we work (from home), shop (online) and pay (by card).
Global investors have been prepared to pay up for resilient, stable growth in the food and household products sector.Healthcare has performed relatively well, with investors putting increasing value on innovation.
Airline, hospitality and leisure have been some of the worst-affected sectors. Bank shares, sensitive to economic growth and with enforced curbs on dividends, have plunged. And 2020 has also been very challenging for oil and gas.
Anecdotally, chief executives of some UK firms with global operations are telling us the UK has been one of the worst-hit regions for them and is proving relatively slow to recover.
Has the growing interest in ESG investment goals intensified this year?
The pandemic has further divided the “haves” from the “have nots” and there seems a general acknowledgement this crisis might trigger real change, with a public appetite for “building back better”. Clients seem to reflect this impetus.
Younger people are being gifted portfolios by an older generation of investors and are showing greater interest in investing responsibly and sustainably – and are influencing their parents to look at investments that generate financial returns, but also positive outcomes for society and the environment.
Over the last three or four years, we’ve seen a significant rise in interest around how we consider climate change, more usually from charity investors and especially universities, lobbied by student bodies. This interest in the environment is now broadening out.
My firm, ASC, incorporates ESG analysis into our research and investment process as standard. If a company is taking care of these matters, it should be far more able to generate sustainable financial returns in the long term.
Upcoming regulatory changes will drive ESG further into the mainstream, making them a mandatory layer in the financial advice process. Firms must take account of clients’ ESG preferences in assessing their investment objectives.
Which wider asset classes have performed well and which have been badly hit?
Central banks globally have flexed their muscles to attempt to fight the crisis. In the UK, interest rates were slashed from 0.75 per cent to 0.1 per cent, and bonds – both government and corporate – have generated positive returns.
We’ve seen little fundamental attraction in gilts beyond their value as a portfolio diversifier in turbulent times,
In March, credit markets froze, with liquidity almost completely withdrawn, even for high-quality corporate issuers. However, as with equities, corporate bonds have benefited since then from investors pricing in economic recovery.
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