Pensions for the ‘new normal’

Julian Lyne
Chief commercial officer
Newton Investment Management

The pensions industry has not been immune to the unprecedented challenges created by the Covid-19 pandemic.

With global equity markets experiencing double-digit declines during an extremely volatile first quarter, pension funds will have seen significant falls in value, and many DC schemes will be evaluating how they can continue to deliver the best possible outcomes for their members.

Schemes will also be exploring how they can continue to engage with members, many of whom are likely to view their pension as even less of a priority than they did before as they now face the prospect of furlough or cuts in pay.

In this environment, it is easy to get distracted by short-term noise, and as investors we want to ensure that our focus is on the long-term trends that will drive investment opportunities and risks.

Among the key questions we are seeking to answer now are, will the world ever be the same again? Will work be carried out in the same way? Will companies be able to respond and thrive in the transformed environment, or be forced to capitulate under the sheer weight of change and debt? The answers to these questions, and other potential scenarios, will inform the investment backdrop.

We are already seeing investment conversations change. For example, in what appears something of a throwback to the 1970s, we are now seeing serious debate surrounding the appropriateness of countries financially underwriting their ‘flag-carrying’ national airlines. Questions are also being asked about the suitability of the mass outsourcing of manufacturing capabilities to countries like China, potentially leaving nations vulnerable to supply-chain distress. These conversations are not being led by Marxist economists or those promoting nationalism, but are open, mainstream debates.

Investment discussions naturally continue to take account of geopolitical risk, but the conversation is now flowing from politics to health provision, jobs and huge economic subsidies, the likes of which have not been seen since the Second World War. Indeed, social factors have been amplified and are being considered on an equal footing to (or even above) traditional capitalist concerns.

The threat of what social dislocation could mean for nations and individuals is openly debated alongside the relative value of a footballer versus a nurse to society. These are different times, and this is a different narrative, with greed definitely not being viewed favourably; note, for example, the backlash seen against those companies that appeared not to be protecting their employees and customers as the pandemic escalated in March.

With such developments in mind, we believe it will be increasingly important for those responsible for pensions to be able to demonstrate to members that they are acting in their best interests.

As investment managers, we will need to think not only about the changing investment landscape, but also about our contribution to society. In this context, it is our view that environmental, social and governance (ESG) analysis will now be more important than ever in enabling investors to have a proper perspective on the investment landscape. Our role as stewards of capital allows us to allocate that capital to those companies that help address some of the big issues we face, including climate change and the continued increase in inequality. Engaging with companies on the ESG issues that matter to people can be an effective way of holding businesses to account and helping to drive positive change.

Schemes may therefore wish to take a step back to ensure that they fully understand the approach being taken by their managers. If trustees believe ESG factors are increasingly important, are these being reflected in the way their default strategies are managed?

Schemes may also wish to re-evaluate the composition of their portfolios in the changed investment landscape. Do they have appropriate exposure to liquid equity or multi-asset funds which seek to capture the post-coronavirus opportunity set, or to fixed-income products that are designed to benefit from the expansion of the ‘green’ economy, and perhaps from the renewed focus on the changing climate and risks associated with that global threat?

Above all, the pensions world will want to offer solutions with exposure to attractive investment opportunities, but which also meet members’ expectations in terms of outcomes and of how they expect their providers to behave in the ‘new normal’.

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