A conventional investment wisdom dictates that a portfolio well diversified between stocks and bonds should weather most market conditions because the two asset classes have little correlation.
But 2022, which saw both equity and bond prices plummet, proved a notable exception to this rule and left the average investor nursing heavy losses.
Whilst the FTSE-100 was unusual in recording a slight gain last year, the MSCI All-Country World Index of stocks lost 18% of its value.
Bond indices worldwide also commonly reported falls of 10% to 15%. Furthermore, whilst equities enjoyed a sharp rebound in the months prior to the recent market correction, bonds have largely continued to disappoint.
A characteristic of bonds is that they usually fall in value when interest rates rise, and during the last 15 months the bank of England has hiked rates from 0.1% to 4%.
This has proved a particular problem for many nearing retirement. It does not affect those in final salary schemes because their employer takes the investment risk. But money purchase schemes commonly use a ‘lifestyling’ approach that gradually switches those in their default funds out of shares and into bonds – typically between the ages of 55 and 65.
There is one school of thought that feels the lifestyling approach is no longer appropriate because its effectiveness depended in part on the fact that most people used to take pension annuities at retirement.
As annuity rates usually become more attractive when interest rates rise, this used to help counteract the impact of bond prices falling. But, since the introduction of the Pensions Freedoms legislation in 2015, relatively few people take annuities – opting for income drawdown instead.
At Chase de Vere, we in fact believe that the lifestyling approach continues to be an appropriate de-risking strategy for most employees going forwards because, if history can be relied upon, bonds will not produce negative annual returns very often.
But that will come as little consolation to those who were intending to retire imminently and have learned that their pension fund is worth far less than they had anticipated. They are facing some difficult decisions.
Indeed, former pensions minister Ros Altmann has been highly vocal in warning of “massive losses” for pensioners retiring this year, and there are widespread reports of major pension providers informing older customers that their funds have dived by 20% or more during the past 12 months.
So do such individuals simply put their retirement plans on hold and continue working until they have made up the shortfall? Or do they switch out of their current fund to one that looks capable of realising more spectacular returns?
The latter approach, of course, involves risk and could leave them facing even greater losses still if stock markets fall further.
Much will depend on the individual’s own circumstances, objectives and appetite for risk, and they could well benefit from one-to-one personal financial advice. Chase de Vere is well placed to help here because, unlike many competitors in the employee benefits space, we have an IFA arm.
We are finding that some employers are willing to fund or part-fund the cost of this advice because they realise that it’s such an important issue for employees.
There is also a fair degree of enlightened self-interest on the employer’s part because reducing financial stress can help combat presenteeism and absenteeism, and if employees are able to retire when they want to it can help with the company’s succession planning.
Alternatively, we can offer generic group workshops and seminars on the same topic, and some of those who attend may choose to follow up with one-to-one personal financial advice sessions.
Either way, it’s important to realise that, although we look at the default fund as part of the corporate governance process, this standard review doesn’t actually address lifestyling – which is an individual rather than a group issue. So further action is required from employers wanting to make a difference in this area.
If you would like to find out more about how Chase de Vere can help with providing pensions advice or guidance to those nearing retirement then please don’t hesitate to contact us.
The value of an investment and the income from it could go down as well as up and investors may not get back the amount originally invested.
The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.
The contents of this article are for information purposes only and do not constitute individual advice.