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Investment, COVID-19 and DC savings

COVID 19 Coronavirus

April 29, 2020

What impact has Q1 2020 had on DC pension pots?

The first quarter of 2020 saw a significant impact on the value of DC pension savings of many. The emergence of COVID-19 has led to uncertainty about both the supply of goods and services and levels of demand. The development of the disease, how it will spread and when it will peak, remains highly uncertain.

Equity markets fell significantly following the spread of the virus to advanced economies and daily volatility has been high, reflecting both the uncertainty and unpredictability of the risks. Bond yields also fell sharply, due to interest rate cuts, lower short-term growth expectations, and negative sentiment.

This slowed current and expected demand for oil, initially causing oil prices to fall c.10% during February. An oil price shock followed on the 6th March, when the OPEC oil states and Russia failed to reach an agreement to cut oil production to help balance supply and demand. This led to Saudi Arabia – the largest OPEC producer – cutting its oil selling price and increasing its production, resulting in oil prices falling by c.30%. This, compounded with COVID-19 fears, caused a major shock in equity and credit markets on the 9th March.

Financial Impact

The first quarter ended with global market indices down by about 16% (in Sterling terms) and government bonds up by 6%, although during the quarter equity markets fell by over 25%. The benefits of diversification were realised with multi-asset funds falling by between 10% and 12%. Sterling also fell dramatically during the quarter, from $1.32 to a low of $1.15 before ending the quarter at $1.24.

Q1 2020 performance
Q1 2020 performance

Source: LGIM as at 3 April 2020

Lifestyle Strategies

Most DC investors will be invested in the scheme’s default lifestyle strategy. This automatically adjusts their exposure to different asset classes over time, reducing risk in the run up to retirement. These strategies have generally been successful in reducing the losses for older members, who are less able to tolerate falls in their savings.

The large falls in equity valuations mean that investors either won’t need to be rebalanced in the short-term or they may observe a small rebalance into their growth assets depending how the lifestyle operates.


The falls witnessed during Q1 2020 are equivalent to a 1 in 20 downside shock on markets. This has led to a significant increase in market volatility with market indices rising and falling by 5% per day. Higher volatility is expected to remain during the short-term. Equities rebounded towards the end of the quarter indicating confidence in the government actions to support economies. While this is a significant fall, equities have delivered very strong positive returns for several years so longer term returns typically remain positive.


Most diversified growth funds (DGFs) seek to achieve a volatility of between a half and two-thirds of equities. Generally, this has been achieved by these funds during the quarter but they ended down by about 10% to 12%. Falling bond yields caused government bond prices to increase. Credit (e.g. UK corporate bonds) fell relative to Gilts as the risk of companies defaulting on payments increased.

Annuity Protection

Funds seeking to mirror movements in annuity prices typically invest in a mixture of Gilts and Corporate Bonds. Falling yields have pushed the cost of annuities and the valuations of bond assets up while the increasing spreads on credit has driven costs and valuations down. Typically, when credit spreads increase substantially, annuity prices do not fall to the same extent. The final point to note is that annuity prices typically do not adjust as quickly as market valuations. Over the quarter the cost of an annuity rose. Annuity protection funds have offered some protection, but lagged annuity price rises which is likely to be due to the impact of the large increase in credit spreads.


The increased level of uncertainty means it has become increasingly difficult to price property assets. In line with recent FCA guidance, this has led many funds that invest in physical property to suspend trading as they cannot ensure investors are buying or selling at an appropriate price. Most schemes or providers will be forced to find an alternative (temporary) home for contributions into their property funds.


The outlook remains uncertain with a wide range of potential economic outcomes dependent upon the spread and the peak of the virus as well as the measures needed to contain it. We expect growth to decline materially during Q2 2020, creating a risk of further falls in the short-term.

Three potential scenarios looking forward include:

  • Global Slowdown – China’s economy starts to recover in Q2 and restrictions are reduced
  • Global Recession – a longer slowdown with China’s economy also taking longer to recover
  • Credit Squeeze – a second wave of outbreaks occurs or there is a more protracted slowdown

Over the medium-term we expect returns from cash and government bonds to fall as a result of the reduction in interest rates, but they would continue to help members manage risks of capital loss or annuity conversion. Investors should seek compensation for the increased volatility in equity markets meaning we expect only modest falls in longer-term equity returns, increasing their premium over bonds. Expected outcomes at retirement are therefore likely to be reduced for many investors.


Willis Towers Watson has prepared this material for general information purposes only and it should not be considered a substitute for specific professional advice. In particular, its contents are not intended by Willis Towers Watson to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. As such, this material should not be relied upon for investment or other financial decisions and no such decisions should be taken on the basis of its contents without seeking specific advice.

This material is based on information available to Willis Towers Watson at 31 March 2020 and takes no account of subsequent developments after that date. In preparing this material we have relied upon data supplied to us by third parties. Whilst reasonable care has been taken to gauge the reliability of this data, we provide no guarantee as to the accuracy or completeness of this data and Willis Towers Watson and its affiliates and their respective directors, officers and employees accept no responsibility and will not be liable for any errors or misrepresentations in the data made by any third party.

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