In our previous article, we introduced our Member Outcomes Tracker as a way of:

1. Putting market events into context for your members
2. Monitoring the potential retirement incomes of your members
3. Identifying areas of focus when communicating with different groups of members

We used the tracker to assess the impact of significant market falls in the immediate aftermath of the Covid-19 pandemic on outcomes for representative DC members.  Since then, markets have recovered from their March lows and, as the following chart shows, members’ projected retirement outcomes are now broadly back on track relative to the position at the start of the year.

Is this really a positive story?

Perhaps, but the swiftness of the recovery in markets belies the precarious financial circumstances of many DC savers.  Some have experienced redundancies or salary reductions and others may be facing higher risk to their job security e.g. as the government’s furlough scheme comes to an end.  We’ve used the tracker to assess the impact of some additional COVID-related scenarios on members’ retirement outcomes and, as Kinna Patel illustrates in her blog, some of these impacts are very material indeed. For example, the impact of salary reductions could be a drop of around 16% to younger members’ outcomes.  

Furthermore, the spectre of a second wave of Covid-19, which could inflict even more significant and long-lasting damage on the economy, looms large.

Against this backdrop, it is unsurprising that pensions may not be uppermost in the minds of DC savers.  Nevertheless, the potential consequences of the pandemic on retirement incomes cannot be ignored and many DC members could have difficult decisions to make in future about how much they need to set aside each month or when they can reasonably expect to retire. 

What action can we take to improve outcomes for members?

Jane has time on her side. She can recover from losses to potential pension income brought about by changes to her salary, or the impact of lower job security.  While it is obviously better to maintain pension contributions if possible, Jane can justifiably focus on her broader financial wellbeing in the shorter term provided she is willing to act later. It is therefore crucial that we have a plan to re-engage younger members in their pension at the right time. For example, when salaries restore to previous levels, or alongside future salary rises.

Louise has less room for manoeuvre than Jane but can still recover her losses if she is willing to save more later or defer her retirement.  However, even with those changes in place, she would be vulnerable to a future market shock brought about by a second wave of the virus. Louise’s investment strategy should be reviewed to ensure it is expected to provide sufficient resilience in the face of future market shocks.

David has some important decisions to make.  Most importantly, David must decide how he plans to spend his retirement.  Does he want to use his pension pot to support a regular income or will he use it to fund travel, or home improvements? It is crucial that David’s investment approach is aligned with his retirement choices – for example, if David wishes to take his pension pot as cash, it will be important to re-test whether the chosen investment approach will preserve capital values effectively through periods of future market shocks.

Please contact your usual Hymans consultant if you’d like to use the tracker to support your ongoing governance arrangements or explore financial wellbeing issues for your members.

More about the Hymans Robertson Member Outcomes tracker

To help you put market events into context for your members, we’ve developed the Hymans Member Outcomes Tracker. By illustrating the impact on longer term outcomes, our tracker can help you identify potential areas of focus when communicating with different groups of members. Our tracker monitors changes to the expected retirement incomes (excluding State Pension) of three typical members, who could represent members of your arrangement:

Jane is 25, part of the “Millennial” generation, and in the early part of her savings journey so she has a modest level of savings. She is most concerned about making ends meet and does not view her pension as a significant priority right now.

Louise is 45, part of “Generation X”, and midway through her savings journey; she has a reasonably sized fund and is hoping for good investment returns in the medium term to build up her pot. She is starting to think about her retirement choices.

David is 60, part of the “Baby Boomer” generation, and plans to retire soon. He has built up a sizeable pension pot through many years of employment and, because he invests in a lifestyle strategy, his savings have started to move into less risky assets. He plans to travel in the early years of his retirement.

Please contact your usual Hymans consultant if you have any questions, or if you’d like to use the tracker to support your ongoing governance arrangements.