Pension Scheme Investment Review - December 2021
As the year reaches its conclusion there is much to reflect on. The performance of the varying Member Scheme Investment Strategies, depending on your appetite for risk, have all performed well across their prescribed mandates. Irrespective of where you sit from a risk perspective, Members’ decisions to plan for retirement and invest have been rewarded.
The provider of these returns by way of global stock markets have performed well in the main and one might argue they have had good reason to. Equity markets have attracted more than $850bn of ‘new money’ invested over the course of 2021; this being a record which surpasses any other full-year investment cycle.
There are arguably clear reasons for this - the continued success of the vaccine roll-out, notwithstanding current Covid pressures, the opening up of economies and a steady return to some degree of normality. Healthy saving reserves and the rebound in demand to spend, invest, travel and enable plans or projects invite some form of economic activity with all the positive multiplier effects that are associated.
However, the macro contributors of generous stimulus measures, loose monetary policy and the safety net provided throughout Covid, significantly increased the money supply. As highlighted, this has multiplied inflows into stock markets linked and related assets throughout 2021 helping to generate positive performance.
It could be argued that this situation only has further to run, as along with improving business data, many of the ingredients which have led to this point will continue to influence markets as we close out the year and move into 2022.
Despite the positivity and accompanying performance, there are numerous challenges for economies, markets and indeed for ourselves and our families as we move forward into 2022. Whilst we seem beyond the acute phase of Covid, it is clear that difficulties remain.
Key among the additional challenges repeatedly raised in past reviews is that of inflation. Predictions are often tricky, especially about the future, but on this measure we have not been disappointed. Despite what the UK Government has sometimes conveyed, the inflationary pressures now with us do not feel ‘transitory’; they are real and rising.
The 2% measure of inflation, typically adopted by advanced economies as the ‘sweet spot’ for encouraging growth/output, has been left far behind. Whether it be your weekly shop, household bills, forecourt petrol prices (currently threatening record levels) or wage pressures, we can see and feel the impact on our pockets.
Crises within energy markets are perhaps illustrative of Government shortcomings both internationally and domestically. The timing of Cop 26, the rhetoric uttered both now and in the past, reminding us of the environmental responsibilities we must engage with. These developments heighten the anxiety felt across commodity markets, key among them, oil and gas prices, which will further fuel inflationary forces.
I labour these points as equity markets are not enthusiastic about rising inflation. Even less so if it is not accompanied by some defensive action, often in the form of rising interest rates. These are some of the headwinds that are in our minds, as we seek to navigate the medium and longer term needs of Pension Scheme Members.
In shifting focus, in part reflective of changes to underlying market conditions and in part to answer a frequent question raised by members. I wanted to make mention of a once-popular income choice for retirees that fell out of fashion - Annuities. An Annuity is simply a method of exchanging some or all of your pension savings for a guaranteed income for life; however long that may be.
In the past the topic of Annuities would have occupied a fair degree of debate for retirees and their advisers. This has not been the case in recent years as for a variety of reasons, not least declining yields of Government Bonds (Gilts), the income bargain struck here has been a poor one for retirees. Many clients have dismissed this option for good reason and the choice of an annuitized retirement solution has declined significantly.
Many considering their retirement choices have explored alternate, more fluid options, given the flexibility now available. Over the intervening years I have often reminded clients that the subject of annuities is one we are likely to return to if the situation improves. When things change, you should consider changing your mind. An Inflation-linked Annuity may again be a worthwhile option to review as rates here continue to improve.
There are many things to consider as we move into 2022 and beyond. There will be far more rigor around Environmental, Social and Governance (ESG) factors and what constitutes sound investment and oversight in this sector. Markets will shift in determining the risks associated with continued supply and demand challenges, the rising cost of energy and labour pressures and a myriad of other considerations and unintended consequences.
It is already clear a degree of uncertainty exists as the Government grapples with the right balance in managing future Monetary and Fiscal policy and the Bank of England (BOE) frets over interest rate strategy. In respect of Rising interest rates it is of course a question of when not if, and to what degree? The recent failure to move when indicated led to a sharp decline in Sterling due to disappointment of traders
That said, Interest rate movements are unlikely to get too exciting and for savers I would not anticipate generating a ‘real return’ on cash deposits anytime soon. Yet another reason to seek a review and manage affairs efficiently in light of the escalating inflationary landscape we now move through.
I close in wishing all Pension Scheme Members the compliments of the Season, safe in the knowledge that whatever market conditions bring, robust, high quality advice and investment solutions will be at their disposal.
Past performance is not a guide to future returns. Please note that the value of your investments can go down as well as up and you could get back less than your original investment.
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