Implications of COVID-19 on the Defined Contribution landscape

Alex Cave |30-Apr-2020

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

 


Three months ago I wrote a view on the year ahead, calling out Master Trusts, Environmental, Social and Governance (ESG) and Alternatives as the big themes for 2020. I had no idea back then of the significance COVID-19 would have, not just from an investment perspective but from a societal perspective as well, in the way it would impact our lives. My heart goes out to all those affected by the illness, but also to the heroes in the NHS, the public services, and the key workers who are working so hard to keep the country functioning. I am taking great comfort in the revived community spirit we see across the UK and I hope that as a nation we can find a way to recognise all our people on the frontline once the dust has started to settle.

This experience has made me realise how much I took for granted; the quick coffees and the ease of catching up with friends. But I feel incredibly fortunate to be part of a firm like BlackRock. Our infrastructure has allowed over 90% of employees to work from home, whilst still effectively investing, trading and servicing our client relationships.  Due to our scale and strong broker relationships we’ve been able to navigate the volatility in the markets and the stability and dependability of our platform has been critical to our clients. Our primary focus has always been risk management and that has brought significant comfort to them in these challenging times.

What we have heard from our Defined Contribution clients and their advisors over the last few weeks is that they have been experiencing a gradual improvement in their working from home set-ups. The initial frustrations with technology have given way to people now feeling settled into a new working rhythm. But what we hear most significantly is the focus on member welfare; helping people through the stress of being put on furlough (a new term for me); ensuring they continue to receive some pay; that their pension contributions continue, and their additional critical benefits like healthcare and life assurance continue, whether they are working or not.  While changes to investments have been almost non-existent for DC members, our clients are rightly focused on investment behaviour, to ensure that poor decisions are not taken at times of stress. As concerning as it is to look at a pension statement which has fallen by perhaps as much as a quarter, we know that the best thing investors with a long time horizon can do, if they are in a fortunate enough position to do so,  is ride this out. After the global financial crisis those investors who sold out, and missed the biggest days of subsequent rallies, did huge damage to their portfolios. Over the following three years markets returned to pre-crisis levels and investors who bought equities with their regular contributions did so at a dramatically reduced rate. So, whilst my immediate instinct might now be to sell and turn holdings into cash, the risk of missing recoveries is significant. And that is why, with 20 years of working life ahead of me (gulp!), I am focused on keeping my contributions going.

Interestingly, the themes I mentioned in my last blog have not entirely gone away. Never before has the visibility and perceived importance of sustainable business practices been highlighted to the extent it is now. Indeed, the way in which companies treat their customers, employees and suppliers is under tight scrutiny. Beyond government pressure to protect jobs, close attention is being paid to how companies treat their staff in these tumultuous times. It is therefore a reasonable assumption that companies that attract positive recognition on this front will see greater loyalty from their staff and be more able to attract new recruits after the crisis. The “S” in ESG, typically less discussed than E and G, could potentially now become an increasingly important metric in determining which companies are better placed to navigate the crisis and a post-COVID-19 world.

The other theme still on the horizon, is the move to Master Trusts, although the timing of this trend has shifted. Right now trustees are focused on their members and their day jobs, even meeting as a trustee group can have challenges and I know one client who was struggling to work out if they were allowed to make investment decisions electronically. This is just one example of the huge challenges DC trustees are facing at the moment. With that in mind I expect a significant pause on schemes deciding to move to Master Trusts for the remainder of the year, there are bigger things to worry about. That said, as we reach the back end of the year and enter 2021, I would not be surprised to see Master Trusts taking an even greater role than I previously expected.  One of the big attractions of Master Trusts is the outsourcing of the governance process, aligned with the potential scale of operations and things like member communications. It will be interesting to see how Master Trusts have delivered on these measures, as well as investment performance in light of COVID-19 and how that potentially influences corporate and trustee decision making.

And on this note, I am going to hold off on any more crystal ball gazing until we have a little more clarity. For now, the digital revolution is (forced) upon us, and whilst on Monday that will mean video conferencing and mobile apps, right now that means a looming “virtual pub quiz” evening ahead with friends, including the invariable frustration with connection speeds and questionable commitment to fancy dress. More importantly, it also means a vital connection with loved ones. 

The opinions expressed are as of April 2020 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.

Alex Cave
Managing Director
Alex Cave, Managing Director, is Head of Defined Contribution at BlackRock.
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