Should UK millennials worry about retirement savings?
Experts weigh up whether job losses and stock market volatility from the coronavirus crisis has caused lasting damage to the retirement savings of British millennials.
Research has shown young workers are among the most vulnerable to job losses or a reduction in working hours as a result of the financial strain of the Covid-19 outbreak.
Jamie Smith, financial advisor at advice firm Foster Denovo, highlighted that in these circumstances a person is less likely to continue to save for retirement.
Once things are back to normal, those who have to temporarily stop adding to their pension may either have to increase their regular savings for retirement, or work for longer in order to make up for lost time.
Young people tend to have their retirement savings more exposed to the stock market, through workplace pension schemes. This is because traditional investment strategies encourage taking on greater investment risk, such as having larger exposure to stocks, the further away you are from retirement. This approach is thought to offer the greatest opportunity to improve the value of your pension, while also allowing for time to recoup losses in case of a market downturn.
However, some U.K. pension funds have been hit hard as a result of the recent stock market volatility during the coronavirus crisis.
For instance, the National Employment Savings Trust (Nest), which with over 8 million members is the largest workplace pension scheme in the U.K., saw its default growth portfolio (Nest 2040 Retirement Fund) fall by just over 8% in the last three months.
These losses wiped out almost as much as the fund had returned over the last three years, according to data from investment fund research website FE Trustnet.
The People’s Pension scheme has nearly 5 million members. Its default Global Investments Fund, which can have up to 85% of its portfolio invested in the stock market, has fallen just over 10% in the last three months. This wiped out all the fund had returned over the last three years.
“For some people it’s going to be a bit of double whammy because not only have they lost their jobs, but if they had kept their jobs, they would have been still saving into their pension and saving at quite attractive levels in the stock market, ” Foster Denovo’s Smith said, adding that some may lose out on the opportunity to “smooth out” recent losses.
On a more positive note, in the last month, both of the aforementioned funds have practically recovered their losses, rising 8% and nearly 10% respectively.
Meanwhile, Tom Selby, senior analyst at investment platform AJ Bell, said a dip in retirement savings would make little difference over an entire working lifetime.
A potential six-month gap in pension saving over the course of a 35-year career would equate to just 1.4% less contributed to a retirement pot, he pointed out.
While a fall in value will have been a shock to anyone checking their pension in the last month, Selby said to bear in mind that, in most cases, this “simply reflects the economic shutdown in countries around the world as a result of Covid-19.”
If history is any guide, he continued, these losses should be recovered over the long-term.
Smith echoed the point that markets tend to recover over time. He suggested that perhaps of even greater concern was the possibility that “nervous” savers divested their retirement savings from the market and moved them into an asset such as cash, as this effectively sets in — or “crystallizes” — losses.
Instead, he said that young workers could view this as an opportunity to save more into their pension, where they can afford to, given the prices of certain stocks remain low, making it cheaper to invest.
“Young workers again may look at this as a good time to take a little bit more investment risk while markets are a little bit lower,” he said.
Jonathan Parker, director at Redington, a U.K. investment consultancy firm to pension funds, reiterated this by pointing out that many U.K. pension funds will be invested in some of the world’s most well-established businesses.
Indeed, the largest single stock position in both Nest and The People’s Pension default funds is technology giant Apple. Since markets started to rebound in mid-March its shares are up more than 30%.
So while some companies have suffered in the short-term, Parker said they would likely recover from this challenging period and “then in 20, 30, 40 years’ time will be much stronger because the price of their shares continue to go up.”
In the U.K., workers pay into both a state pension through what is effectively a tax on their pay, called national insurance contributions, and also a workplace pension.
A workplace pension is contributed to through an “auto-enrolment” system where an employee is automatically registered into a pension scheme. They currently contribute a minimum of 5% of their salary each month and the employer also has to pay in at least 3% into this fund.
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