Winston Churchill’s words of November 1942 seem appropriate at the moment: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
We are living through remarkable times and, on a daily basis, we’re building a study for future historians.
The extraordinary amounts of money that governments around the world have committed to tackle the economic fallout, along with gloomy economic forecasts, make scary reading. The fact that the WTI crude oil price went negative tells us everything we need to know about the bizarre times we’re living through.
No one knows how this will all play out and, as we’ve said before, it’s uncertainty that spooks investment markets because analysts and economists don’t have any reliable data to feed into their prediction systems.
So, we expect markets to continue to be volatile for a while yet. We need a clearer view of the future before there can be any reliable period of stability.
Diversified Growth Fund holding steady
The NOW: Pensions Diversified Growth Fund (DGF) has held up well during these turbulent times. No one is totally immune from the economic impact, but our all-weather approach to investing has continued to protect members from the worst of the storm. While the FTSE 100 is down almost 23% since the start of the year, the DGF is down roughly 9.5%.
But enough of the bleak picture. We want to be cheerful and share three reasons why saving through a workplace pension with NOW: Pensions is such a good idea.
To keep things in perspective, the percentage drop in the value of the DGF since the beginning of the year is less than the contribution paid by HMRC towards a member’s pension fund over the same period.
Let’s assume £100 was invested into the NOW: Pensions DGF on 1 January this year. A member would have paid £50 of that total, with HMRC paying £12.50 in the form of tax relief and the employer paying £37.50. At the time of writing, the £50 paid by the member would be worth £90.50, an increase of 80% on the amount paid in. The diagram below shows an illustration of how this would be calculated.
Note: This explanation is based on auto enrolment minimum contributions.
The DGF is designed to deliver strong returns over the long-term regardless of economic conditions. Yes, recent market conditions have been extremely challenging, but to highlight what our all-weather approach means in practice, if the £100 above had been invested in the FTSE 100, it would now be worth £77.30.
Members who pay regular contributions into their pension fund benefit from what is known as pound cost averaging. This means each contribution buys units at a different price, which has the benefit of smoothing out the highs and the lows of the markets.
With prices currently lower than they have been, each contribution is buying a higher number of units, and this benefits members over the longer term. Let’s look at a hypothetical example:
|Total contribution paid
|Final unit price
|Number of units
In this example, the unit price has ended at the same price as it started, but the value of the fund has increased by £15.75. Over the longer term the unit price should increase considerably, so the advantage of buying more units at a cheaper price multiplies.
To ensure that sudden market movements don’t force members who are due to retire shortly to alter their plans, we start moving members’ funds towards much safer investments as their retirement age approaches. We begin this process when members are ten years away from retirement, and when they are within three months of their retirement age, 80% of their pension fund will be invested in a safe environment.
A member about to retire and take their pension fund from NOW: Pensions would have experienced a drop of around 1.9% since the beginning of the year. Yes, it’s still a drop, but compared with a fall of almost 23% if the fund had been invested in the FTSE 100, we think that’s pretty good protection and we hope it offers peace of mind.
These are turbulent times, but markets will recover and if there’s one message that we should all remember, it is that saving through a workplace pension scheme gives many reasons to be cheerful.
Rob Booth, Director of Investment and Product Development