The world economy is facing a big challenge as the coronavirus outbreak causes a drastic drop in financial markets across the globe. This has a direct impact on pension investments and pension holders may be concerned about the value of their pension fund, and how this may affect their retirement savings.

You may also be asking yourself what the most appropriate course of action is at the moment. Should you continue your regular contributions? Should you take a pause, and wait for all this to be over before resuming your monthly payments? Or should you just keep to cash savings as this pandemic is the perfect example of how volatile financial markets can be when put to the test?

Disheartening as it may be to catch a glimpse of your pension statement and see that the value of your hard-earned money has dropped significantly, the first call to action is to remain calm and figure out the bigger picture.

In reality it only represents a paper loss, unless retirement is on the doorstep. A reliable pension provider would have carefully designed their scheme to safeguard your retirement needs and adhere to all professional standards when considering factors to mitigate various types of investment risk.

There are a wide range of factors to consider in relation to your pension savings that help generate peace of mind in the current turbulent environment.

Diversification: Don’t put all your eggs in one basket.

A well-diversified investment portfolio allows market risk to be spread across a wide range of countries, industry sectors, companies and asset classes. A well-diversified investment strategy helps provide reassurance that once the global economy starts to recover, and different countries and industries recover at different paces, the strategy will not have all their exposure in just one sector or one country. This diversification should help them experience a smoother recovery path.

Long Term Outlook

Pensions are designed for investment over the long term, typically described as ten years or longer. History has shown us that for the patient investor, market downturns are not detrimental to the value of a pension fund over the long term.

All of the major world economic crises are testimony that, overall, and over time, the markets recover. The 2007 global economic crisis saw a recovery in just under 3 years. Even the renowned 1987 “Black Monday” crash saw the markets recover in under 2 years. We certainly cannot know how long this current market crisis caused by the coronavirus pandemic will take to recover, but there’s reason for long-term confidence in the markets.

The key is to be invested in reputable companies with a good track record and strong balance sheet that are likely to weather the storm.

Pound Cost Averaging: Believe it or not, there are still some positives

Most of us build our pension pots via regular monthly contributions over many years. The good news is that as financial markets fall, the prices to purchase these investments also fall, creating an opportunity for all of us who make monthly pension contributions.

This enables us to buy cheap, accumulate value, and still retain those investments over the long-term. Once the markets recover and our accumulated investment holdings grow in value, we will be rewarded. We can then once again enjoy receiving our pension statements.

Cash: Not a substitute for long term investments

Cash will inevitably, over a sustained period of time, lose its value to inflation, and whilst necessary for liquidity and short term emergency reserves, it is extremely unlikely to provide the best returns over the long term (10 years and over).

Pension plans that have over ten years left until retirement should always contain some investment element, even if this means some level of exposure to market volatility.

We can find reassurance in a sensible investment selection strategy that includes a well-diversified and professionally managed portfolio that meets our appetite and attitude to risk and is invested over the long term. We should not be tempted to panic-sell our investments, and if in doubt, we should always consult an independent financial adviser for guidance before taking any action.

Anyone with plans to retire and take their pension benefits in the next couple of years should seek professional financial advice, as the markets may take longer to recover and they may have to review their retirement plans.

For the majority of pension savers, however, with a long term view, it makes sense to remain confident, continue with or increase monthly contributions to make the most of the opportunity in the falling markets and patiently wait for the world to recover.

Written by Joanne Rodriguez DipFA