Interactive Investor

What does the war in Ukraine mean for pensions?

14th March 2022 11:42

Rebecca O'Connor from interactive investor

The war in Ukraine has consequences for global stock markets, which in turn could affect the value of pension funds, says our head of pensions and savings Rebecca O'Connor.

The war in Ukraine is unnerving global stock markets, which has implications for the value of pension pots and by extension, retirement plans.

Initially, the concern among pension savers was that they did not want to be invested in Russian companies. A number of pension providers responded swiftly to the invasion by declaring their intention to divest from Russian holdings.

But this principled move will not insulate the value of our pension funds from the impact of the war on the global stock market, which underpins 22.4 million* defined contribution workplace as well as millions more non-workplace personal pensions.

Even with minimal exposure to the Russian economy, pension investments are exposed to the general global uncertainty caused by the war, because they are invested in assets that span global stock markets. Many global companies are affected by the war too – particularly, but not exclusively, those that sell products and services to the Russian market.

However, the way pensions are invested – usually according to global, multi-asset strategies, is designed to reduce risk through diversification and slowly grow the value of a fund in a way that beats inflation over time. Some adjust the risk level according to the target retirement date of the pension holder, reducing it as someone nears retirement to mitigate the risk of stock market falls right before retirement, which could unduly damage the value of someone’s retirement pot.

The average value of a Self-Invested Personal Pension (SIPP) has fallen by 12% from £221,713 at the end of December 2021 to £202,134 at the end of February and the start of the Russian invasion of Ukraine, to £196,109 now, according to interactive investor data. The falls at the start of the year have been a consequence not only of the war, but also the preceding rise in interest rates and the end of quantitative easing, among other factors that turned general sentiment negative from mid-January onwards.

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “The war in Ukraine has consequences for global stock markets, which in turn could affect the value of pension funds.

“For those years away from retirement, this should not be too concerning – they may have decades left for markets to recover enough to restore their pension value to rude health.

“It is more concerning for people who are close to, or in retirement. But how consequential it will be for older people depends on a number of factors, including their individual exposure to global equities.

“Some pension holders will be feeling relieved they had reduced the risk of their portfolio to some extent in the run up to retirement. Others may be kicking themselves that they left too much to the ups and downs of equities too close to the date they plan to take an income.

“The bottom line for anyone now, regardless of what they have or haven’t already done to stem losses, is not to panic. Selling locks in losses. If you don’t need to sell now and can wait to draw an income, you are likely to be rewarded by a recovery in values, when it comes. This is more important for retirees or people close to retirement than anyone.

Younger people with pensions

“It’s also especially important for younger pension investors, who have started to show signs of becoming more engaged in their pension investments, not to worry. The rise in interest in pensions among younger workers has come about thanks to a surge in interest in green pensions, as well as the development of technology and apps making it easier to more frequently check in on pension fund values.

“While a higher level of engagement in pensions is a good thing, because it can inspire people to invest more in their pension for later life, the flipside is that for those with little stock market experience, there is a risk of becoming unduly concerned and scared of the impact of markets on their pension pots.”

What’s in a normal workplace pension fund and what has happened to their values?

Pension funds’ top holdings lists are currently dominated by US technology companies.

A typical list of top 10 holdings in a workplace pension might look something like this:

Source: NEST top 10 holdings December 2021.

Holding

Share price movement from 01.01.2022 to 10.03.2022

Apple

-10.7%

Microsoft

-15.1%

Prologis (NYSE:PLD)

-10.3%

Accenture (NYSE:ACN)

-25.3%

Taiwan Semiconductor Manufacturing

-13.6%

Amazon

-11.9%

Texas Instruments (NASDAQ:TXN)

-8.34%

Intuit (NASDAQ:INTU)

-29.7%

Nvidia

-23%

Target (NYSE:TGT)

-7.16%

Source: The People’s Pension top 10 holdings 85% shares fund.

Should I be worried about my pension?

This depends on how close you are to wanting to take an income from your pension. This is not necessarily the same as the time preceding retirement, which might be much later. You can access your pension from age 55. You won’t get any state pension until age 66, rising to 67.

If you are at or approaching retirement:

  • Remember that a loss is not a loss until you sell. If your pension fund has taken a hit and you don’t need the money yet, you don’t have to take any out. You could leave your money in your pension for as long as possible to allow time for its value to rise again. This could mean working for a little longer to keep some income coming in, if this is an option for you.
  • You could also consider whether other assets, either from savings or ISAs, could help tide you over to keep your pension invested for longer.
  • If you are specifically concerned about exposure to Russia, you can contact your pension fund for a list of its holdings and what its plans are for any Russian holdings.
  • Consider seeking independent financial advice
  • Book an appointment with Pension Wise, the free government pension guidance service

If you are working and several years away from retirement:

  • There is no need to respond to current market conditions as you have years left to make up for any losses experienced in the first few months of this year.
  • If the thought of the value of your pension or any other investments falling makes you feel anxious then avoiding checking your pension frequently can help.
  • Only focus on what you can control. You can control the fees and charges on your pension. But you cannot control market volatility or inflation.
  • As above, if you are specifically concerned about exposure to Russia, you can contact your pension fund for a list of its holdings and what its plans are for any Russian holdings.
  • If you would prefer your retirement savings to be built on ethical and sustainable foundations, avoiding weaponry and exposure to Russia, as well as activities such as oil and gas production and tobacco, consider whether your pension reflects your values. Interactive investor offers the ACE 40 list of funds as well as an ‘ethical long list’, all of which can be invested in Self-Invested Personal Pensions on the platform.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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