There have been significant market slides recently. How can I protect my pension?
Mike Freer replies:
AS you point out, stock markets have woken up to the scale of the economic problems posed by Covid-19, particularly when added to strains that were already there from trade wars.
China is the economic engine that drives many developed world economies: ‘Made in China’ is stamped on everything from children’s toys to iPhones so it is no surprise that disruptions in China have global economic consequences.
If you are in a defined benefit (final salary) scheme, then it is your employer who will be bearing the investment consequences. Provided your employer continues to meet the scheme’s bills, your own benefits are guaranteed.
Members of defined contribution (aka money purchase’) schemes bear the investment risk themselves. For them it is the period to retirement that is crucial. Equity markets have provided very good long-term investment returns but the ride can be bumpy. In ten years’ time we might expect Covid-19 to take its place with the SARS and MERS outbreaks as a distant memory and a blip on returns. In between times, your pension contributions are buying equities at a reduced price.
Closer to retirement, however, there may be insufficient time for markets to recover, and pension benefits may be adversely affected. But only if members are invested in these equities. Bonds have performed very well in the crisis, as money floods to safer assets. So investing in these would have improved retirement benefits.
Many defined contribution schemes offer this transition from equities to bonds as part of an automated process known as lifestyle. Something like this might be a solution for members who think they already have enough to worry about.
