S&P 500 – 04/04/2025
FTSE 100 – 04/04/2025
In a recent talk with the IFS, Paul Todd, COO of Nest, explained that Nest’s long term ambition is to pay pensions without putting at risk the pension. Only the increases payable on pensions in payment might not be paid when times are hard. This is known as conditional indexation amongst those running large pension schemes such as USS. USS too wishes to move to a position where it can choose not to pay a full increase in bad times but meet the needs of pensioners for an inflation linked pension in the longer term. We might call this smoothing and the capital backing the promise to pay in time is the capital in the scheme.
A test for DC pensions that want to pay pensions.
Looking at the two charts, it is clear that if you looking to invest in US large quoted stocks or their equivalent in the UK , you are facing a big write-down in the value of your investments because of the perceived impact of US Tariffs.
The question that anyone looking to make promises about pension income is the impact of Tariffs on assets held and the cost of meeting the liabilities in a new financial environment. Almost every market is down
Things in Europe are no better than in America, following retaliatory Tariffs from China.
There is no CIO who can find a way round the problems to assets or can anticipate bonds, infrastructure or what folk will pay for private assets in such a fire sale.
Nest will properly argue that they are building an investment strategy that is resilient because it gets income whatever the market’s state, because people must pay their bills.
I can imagine that a financial war, as the USA has embarked upon is no more frightening than the impact of a pandemic or of the financial crisis of 2008 or the technology crisis at the start of the century.
Large schemes like NEST or USS with assets above £50bn (before the crash) will be resilient but what about people investing for themselves? What about the “flex and fix” brigade operating their own private drawdown? How will they be able to find liquidity in their portfolios without selling assets at a deeply depressed price and doing long-term damage to their “portfolios”. That is what the proposal from the IFS and from some mastertrusts and insurance companies is as our “decumulation default”.
The reality for ordinary people without the support of being in a pension scheme like Nest or USS with substantial capital behind it , is that they are on their own in an individual strategy that only has the fall-back of an individual’s other savings to pay income when times are hard (as they are and will be now).
I am sure that many will have cash ISAs and other liquid, less vulnerable accounts than the pension pot. They might be able to turn off income from a drawdown from the mystery pot but will they get there in time, will they know what to do , will the administrator do it and when will the tap be turned back on?
The harsh reality of the kind of problems we are facing right now is that individuals do not have the protection that they need in their retirement , unless they have substantial protection from a pension scheme geared to meet the kind of problems created by the Tariff war.
“Flex and fix” is a proposal to tough it out in drawdown from invested funds when those funds are crashing as they will be now.
Being in a large collective fund, backed by capital (and capital is available to provide such protection) is critical. The importance of collective funds is that they are large enough and have sufficient cash (liquidity) to meet the needs of its pensioners for long enough.
Right now , looking at the charts in this blog, you may think that funds should not be exposed to growth stocks for returns. But now is the time that those in large DB (USS) or DC (Nest) or CDC (Royal Mail) must be reassured that their pension is not in danger and is in the hands of managers, trustees and regulators who have tested this scenario many times before.
This is where we need strong leadership from our market leading schemes and words of encouragement from legislators and regulators keen for us to have the confidence to be part of collective pension schemes that meet our needs today and tomorrow.
An advised draw down client would not be in a forced sell off position
The DIY beneficiary who has himself as a client has a fool as a client and may
have the extreme asset allocation you describe but the average beneficiary will have a pot of a size unable to provide a meaningful benefit in any circumstance. Andrew Smithers identified the valuation concerns when he last attended a coffee morning. That fundamental weakness is now more obvious.
In DB pensions, I would expect prudent trustees to have a cash buffer with which to pay pensions without having to resort to forced equity (or other) sales at times such as these.
How much of a buffer? At last enough for six months’, if not a year’s, pensions and other budgeted payments. Long enough to consider which diversified assets may be realised over time to avoid significant forced selling, and even to restore the cash buffer for future situations.
There may be scope for having a short-term borrowing facility (aka an overdraft) as permitted by the 2005 Investment Regs. If not directly with a bank, then with the sponsor on a contingent basis? Some trustees may call such a facility “escrow”.
But the LDI crash in 2022, when there seem to have been forced sales to pay margin calls, may suggest not all DB trustees were as prudent at that time?
Similar buffer principles can be applied by advised DC individuals, as JM suggests, within flex arrangements.