Millions of workers are receiving the grim news that their retirement pots have taken a severe hit over the past year.
It is little wonder that the nation’s pension statements make for such bleak reading following a 12 month period that has seen global stockmarkets dive by 42 per cent and corporate bonds and property also lurch deep into the red. There have been few places for investors to hide as the credit crunch has morphed into a fullblown recession.
So, against this backdrop of a near daily deterioration of the economic outlook, how can corporate advisers best help their clients to reassure their employees and restore confidence in their pension schemes?
Employee benefits consultants stress the importance of close client contact with many providing frequent updates on the market turmoil and running seminars for scheme members.
“There has been a lot of hand-hold- ing,” says Crispin Lace, a senior investment consultant at Mercer. “We have been very conscious of contacting them on a regular basis to talk through the issues and provide analysis on the impact of events on their portfolios.”
Helen Dowsey, principal of Aon Consulting’s Benefits Solutions division, says the underlying message has been one of “don’t panic”, pointing out that much of the work they have been carrying out has effectively been a reinforcement of their ongoing educational effort.
“I think everyone is very nervous and the message that we have been trying to deliver to trustees and members is that equities have outperformed every other asset class over the last 30 years and we see no reason for that to change,” she says.
Dowsey says this is particularly important to get across to people in their 20s and 30s who risk being scared out of the market and into cash which could have very serious repercussions for the purchasing power of their pension pots when they come to retirement.
However, the strength of the ‘invest for the long term’ argument has undoubtedly taken a hit following the recent market falls. Admittedly, pension savers often have longer-term horizons but, until recently, 10 years was broadly considered long term. In the decade ending November 7, the MSCI World Index has actually returned -1.31 per cent.
“It does not really matter where you have been invested over the past 10 years because at best returns have been at or around cash and equities have actually been the worst asset class,” says David Bird, a principal in Towers Perrin’s retirement practice.
This will reflect particularly badly on defined contribution arrangements, he says, as the majority are “not that old”.
Those people close to retirement in particular will be rueing the demise of final salary schemes. While a lot of the talk around handling employee communications has focused on the younger generations, there is little doubt that hundreds of thousands of people in their 50s and 60s are facing very difficult decisions about their retirement planning options.
The problem is compounded by the fact that over 80 per cent of members are in default funds, the majority of which have a lifestyling function, which generally kicks in 5-15 years before the nominated retirement date. This automatically switches the asset mix out of equities into cash and bonds, but following the recent stockmarket falls it will lock in those losses leaving the individual to pin any hopes of rebuilding their pension pot on lowrisk assets.
Andy Cheseldine, a senior consultant at Hewitt, says that these individuals fall mainly into two camps.
“The great news is that lifestyling has worked for those people close to retirement and their benefits have been largely unaffected,” he says.
The bad news is for those who are about to enter into lifestyling as the vast majority of people never change their investment mix.
“Without individual advice it is very difficult and that is not something employee benefits consultants do,” Cheseldine says. “You need to know whether they can afford to put in more, have paid their mortgage, expect to inherit or have enough assets to be able to take more risk.”
Dowsey says the reality is that many will end up having to work longer, and she expects this trend to grow over time as the state pension age is raised.
Those receiving individual advice are also likely to be guided to more flexible retirement solutions, such as income drawdown.
To Bird, the issues around communicating this message to scheme members and the need for individual advice highlight one of the major problems around the move to contractbased DC pensions.
“It is not clearly defined upfront who is responsible for the members. The client in one way is the company but the members are the ones you have to worry about and nobody is really getting to them effectively,” he says.
“The fact that the question of how you break the bad news about the markets to members is such a difficult question reflects the failure of Government policy and communication to members.
“When employers offer contractbased DC and stop having responsibility for their employees’ pensions, they should behave like that and make sure that they understand them so that members do not come back to them with these questions when they are approaching retirement,” he says.
Certainly, Fidelity has seen a massive upsurge in scheme members being pro-active about their pensions. Its call centres report a 20 per cent increase in the volume of enquiries received in the past two months.
Reading this as a genuine increase in member engagement may be a step too far given the level of panic in the market.
However, corporate advisers have been able to draw a handful of positives from the current crisis.
The demand for their expertise has never been higher and the way above levels of client contact seen over the last year have undoubtedly helped to demonstrate the value of advice and cement relationships further in many cases.
As an example, Lace points out that intermediaries can now show the sound thinking behind many of the checks and balances they put in place on the managers of the scheme’s funds.
“It can be very helpful. Advisers can show the value of the agreements they put in place with fund managers, such as why they stressed the importance of limiting the amount of counter-party risk they can take on,” he says.
The downside is that the main beneficiaries of any positives that have come out of the past year are the intermediary and their client. For the members, particularly those approaching retirement, it is very difficult to see beyond the potentially life-changing negatives.