Peter Crush

If there’s one thing that preys on pension savers’ minds more than anything else it surely has to be this – stories of catastrophic stock market crashes responsible for turning once healthy retirement pots into little more than pennies.

Take only earlier this year, February in fact. After six consecutive days of losses on the FTSE 100 (which had seen 7% of its value disappear, wiping £77 billion of the value of these companies), the press went into overdrive. Headlines claiming ‘millions had been wiped off’ people’s pensions abounded, reinforcing fears that volatility was simply too great at the moment to consider pension saving.

This followed 2015’s so-called ‘Black Monday’, when the FTSE lost £60 billion in a matter of hours, which of itself, followed the worst of the lot – 2008’s global financial crash, which slashed the value of UK pension funds from £2.2 trillion in 2007, to £1.8 trillion within just twelve months[1]. According to a report by Money Mail last autumn, the impact of the crash is still being felt today. It found a couple retiring now with a £100,000 pension pot and £40,000 in cash are now only able to get half the income they would have got before the financial crash struck a decade earlier (£5,383 versus £9,909 per year in 2007[2]. That’s no small fall.

And yet the trouble is, many think the next big stock market crash is only just around the corner – thanks to continued uncertainly around Brexit (deal or no deal being struck). Because while financial experts might disagree over the finer details of exactly what will happen, the overwhelming consensus seems to be that investment returns will only do downwards (predictions include a 15% fall in equities and a 0.5% fall in long-dated gilt yields[3]) – which for many people, signals one thing when it comes to their pension pots: potential disaster.

But does it? When it comes to Brexit, should some common sense actually start to prevail? Is there actually more reason to cheer than reasons to fear?

It’s certainly an intriguing question. For while there’s barely a single commentator that doesn’t think some short-term shock to the stock markets will happen at the moment of the UK’s ‘conscious uncoupling’, if history has taught us anything about the yo-yoing of the stock market it’s also this – that generally, things do get better in the end, especially over protracted periods of time.

Looking at things with a slightly longer lens, for instance, and this does get borne out. For example, since 2000 (nearly 20 years now), there have only been two 12-month periods where the FTSE All Share index has lost a third of its value, and even despite this, it has subsequently recovered.[4] Moreover, while share price falls may send shivers down the spine, there are plenty of commentators too that think crashes are also an opportunity – because pension fund managers can hoover up shares at rock-bottom prices; shares that will be fairly certain of making large returns on when the ‘re-correction’ occurs.

So, should fears of cliff-edges be taken with a pinch of salt?

For DC pension scheme owners – who, thanks to pension freedoms, now have to pick the level of volatility they want their pension pots to be exposed to – the myriad machinations can certainly appear complex. But, even though short-term stock market performance hasn’t always been that much to shout about recently – between 2014-15 the S&P 500 returned only 1.2% (including reinvested dividends), while hedge funds made just 0.04 per cent on average[5] – the consensus amongst most analysts is that 5% annual returns, over the course of a pension’s life is still reasonable to expect. This is accounting for the very big ups, and very big downs.

In short – the stock exchange can still be counted on – at least over the length of most people’s working lives – to deliver a reasonably predictable yield.

So, the far more likely outcome is that while Brexit will undoubtedly signal immediate share price and commodities oscillations, generally speaking financial markets soon realise that a new norm is here, and that there’s no point getting too short term about things.

Thankfully now that many pension savers have access to advice where they can see for themselves what 5%, or 3% or 2% returns over the life of their savings will look like, and see how short term changes could impact their final pots, knee-jerk reactions can be avoided. At least by talking to an independent financial adviser, workers will have some real facts at their disposal; facts that they’ll be able to use to make informed decisions about which risk of fund they want to expose themselves to. In the next six months, when they’ll be lots of hearsay and guesstimates at-best, having some real data surely can’t be a back thing, especially when thinking about how Brexit will go.



[3] According to XPS Group: