Covid Carnage: what’s the outlook for pensions?

I’ve had a number of PM’s recently from former colleagues, friends and associates all asking similar questions about their respective pensions, following the dramatic Covid led sell off of stock markets and other asset classes around the world.

These questions fall broadly into two areas, (DC) Defined Contribution schemes such as SIPP’s, and (DB) Defined Benefit schemes organised by employers.

With the lawn cut and pots planted, I now have some free time to write a brief overview of the DC scenario as I see it, hopefully providing some background and perspective for anyone else fretting about their pension plans. I will try and do the DB scenario next weekend if I have time.  

The following is not investment advice, and should not be taken as such. It is my personal opinion based on over 30 years of investing in the stock markets, and of my experience as a former pension scheme trustee and chairman.     

Defined Contribution Schemes

The general gist of the questions I have received are along the lines of: WTF!? my pension pot is down XX%, I’ve lost thousands, tens of thousands, hundreds of thousands, what should I do? Sell, buy, nothing, cry?    

Firstly, as we have all heard time and time again, market sell offs or corrections are nothing new, and generally nothing to get too concerned about unless you are on the cusp of retirement.

It wasn’t that long ago that a full blown bear market ravaged our pension pots back in 2008, well within most long term investors memories. But, the sheer speed and size of the pandemic induced declines around the world has caught many off guard, and even those with well diversified portfolios have not escaped as nearly every asset class has been hit hard with the indiscriminate selling.

Even with a slight relief rally, markets have still dropped over 30% since mid-February, with many sectors down as much as 75%-80%. Think travel, leisure, hotels etc. Silver and oil hit multi decade lows, US shares recorded their biggest ever one day decline, and fastest ever decline into correction territory (-20%), and the UK FTSE 100 recorded its 2nd worst day ever, even beating black Monday. UK mid-caps nearly halved from 22000 to 12000, and safe havens like investment grade corporate bonds have suffered 15% losses. Financial carnage for sure.  

Are we at the bottom yet?

The simple answer is nobody knows. If Warren Buffet can’t call it, then I certainly can’t. There does appear to be some current support of the FTSE 100 at around the 5000 level, but I wouldn’t be at all surprised if it bounced along in the sub five thousand range for a while, as the true financial costs of the pandemic can be counted by corporate failures, dividend cancellations, job losses, and the length of the imminent recession. Market commentators are already declaring that covid-19 will have a bigger impact on the economy and markets than the financial crisis did.

Previous market crashes, notably in 1987, have demonstrated a pattern. The market falls steeply, there’s then a relief rally after governments and central banks come to the rescue. And then another leg down when investors despair again and realise that a recession is on the way, perhaps after some big companies are going to go bust. This second leg down usually drops to the same level as the initial crash (4945). The recovery may well build from there, although it will be a long and winding road.

Should I sell?

If you haven’t sold already, then you are too late. It can be a big mistake to lose confidence and sell investments that have slumped, unless you desperately and urgently need the money. Selling would simply crystallise your losses and potentially put you out of the market when the recovery happens. As we have already seen, significant daily jumps (+9%) can occur at any time after losses, and timing the markets is near impossible. 

Should we now be buying?

As for buying, I guess that very much depends on your own personal circumstances. If you have been or are likely to be furloughed or made redundant, then conserving your cash should be a priority.

I have dipped my toe in the water with a few index trackers which I bought when the market hit a five year low, as to me, the ability to effectively travel back in time and invest is a great opportunity not to be missed.

As it happens, I was still a bit quick off the mark with these trades as a week later the market hit ten year lows of 4945, another great buying opportunity!

If you are able to make or boost your regular contributions to your pension, you can make your money work much harder as you will benefit from pound cost averaging. Regular contributions have the effect of buying more shares when the price is lower and fewer shares when the price is higher. In a falling or volatile market, this will give you more units at a lower average purchase price than if you simply invested the full lump sum at the beginning of the period.

Buying index trackers or diversified income generating funds is probably the safest option for the moment, as individual stock picking will be no more than gambling right now IMHO. If the likes of BA, Easyjet, Hammerson and Intu are on the cusp of bankruptcy, what hope do we have of picking medium and small firms that can survive let alone prosper? It will pay to see who is left standing when all this is over, before selecting individual stocks.  

 Recovery

Despite the enormity of the Covid-19 crisis, and the many unknowns including how long the lockdown will go on for, the markets will eventually recover, and one day reach and exceed previous record levels, and start paying dividends once again, which are essential for pensioner’s incomes.

The difficulty of course is knowing how long they will take to recover, compared to how far away your planned retirement is.

The table on the right shows how long stock markets have taken to recoup their losses after previous crises. While it has varied a great deal, the average recovery time is 648 days, and the economy typically bounces back in around one year. The longest recovery period was four years, after the 2007-8 financial crisis, but of course this is no ordinary crisis.

Interestingly, when looking at the US market during the 1918-19 Spanish flu pandemic which killed 50m worldwide, the market impact looks relatively small, and is then followed by a significant up trend during the roaring twenties. Past performance is no guarantee of the future.

To conclude

If your pension pot is underwater, you are not alone, pension portfolios around the globe are hurting, and many have given back the gains made over the last five to ten years.

The recovery will come, in a month, six months, a year, five years or even a decade, who knows. But when the recovery does come, those investors who have had the patience and nerve to hold on for better times, should be rewarded with very strong returns.

A final thought on TAX

Chancellor Rishi Sunak has introduced a number of measures to tackle the Covid crisis. He’s introduced ￡330 billion of loan guarantees, ￡200 billion of quantitative easing, spent at least an additional ￡27 billion guaranteeing 80% of salaries for employees, freelancers and the self-employed, and made grants available to small businesses. No doubt there will be more to come at an even greater cost, as nearly half the country will be furloughed in the next 4-8 weeks if the lockdown isn’t lifted.

I would highly recommend you use all of your tax allowances, ISA savings, pension tax relief’s whilst you still can, because even if you don’t use the financial help on offer, the likes of billionaires Mike Ashley and Philip Green are, and when the day of reckoning comes and Sunak wants his money back, we will ALL be paying for it through higher taxes. 

Phil Bellamy FCII, Managing Director of Tibbington Consulting Ltd

Phil has been underwriting ATE and BTE legal expenses insurance for more than 30 years, and now provides help and assistance to senior figures in the insurance, legal and litigation funding industry. Click here to view Phil’s credentials document.