If you are keeping a close eye on your pension investments and savings, market volatility is a worry. A portfolio that was perfectly balanced last week can start to look slightly unhinged after a few weeks of turbulent markets. Investors might begin to wonder whether volatility is like that or whether new trends are emerging and whether they should rebalance accordingly. The closer to retirement age, the worse the dilemma becomes. Why? Investors obviously want to retire with as much in their pension pot as possible, but they need to tread the fine line between high risk and high returns, and asset protection. If they get it wrong too close to retirement and the portfolio’s worth declines significantly, then recovery might be difficult.

 UK investors will be more familiar with this after the Bank of England recently made an emergency intervention amid fears that some pension funds were at risk of collapsing. At the end of September, it pledged to buy £65 billion of government bonds after the government’s mini-budget was poorly received by markets. The turmoil that followed caused sterling to plunge, and bond investors demanded higher returns from their investments, causing bonds to plummet too. The Bank of England said at the time that there was a ‘material risk to UK financial stability’, and there was massive concern that some pension funds across the industry were close to collapse.

In the aftermath of that, inflation is now exceeding 10%, there are macro and geopolitical concerns, and recession is looming with a cost of living crisis and skyrocketing utility bills. A winter of discontent lies ahead, with public sector strikes set to cause widespread disruption.

But, as ever, what goes down must come up. HSBC sees a silver lining. In its Wealth Insights series, it says that the outlook for 2023 is not horrendous. ‘After a volatile, challenging year, investors are at a crossroads. Despite uncertainty around geopolitics and exactly when the rate, inflation, and growth cycles will turn, it is worth noting that almost all assets have been repriced since early 2022. It is therefore important to stay invested and build a diversified portfolio of high-quality assets while waiting for more clarity to take riskier bets,’ the bank says. 

Indeed, for pension investors, the message is to hold tight! Pensions are, after all, a long-term investment. Making decisions based on short-term fluctuations is, therefore, not the right strategy, particularly when the investor still has a long way to go until retirement. Changing course to minimise losses could even, on the contrary, lead to losing out once markets bounce back. This would have significant long-term consequences for financial wellbeing and retirement. 

But what if the investor is close to retirement or has already retired but is still invested?

Those close to retirement have probably already reduced the risk in their portfolio. They are no longer looking to maximise returns but to preserve the portfolio’s value and liquidate assets to minimise potential losses. Setting up the portfolio in this way means that it should be resilient enough to compensate for short-term volatility. And those with more than five years to go until retirement generally are well-positioned to ride out inflation, and other short-term performance drags. 

Company pension schemes are often set up to automatically reduce risk as retirement age approaches. Many advisers likewise follow this ‘lifestyle’ risk assessment and reduce risk as retirement approaches.

But lastly, what if someone already retired? Should one stay invested and hope for a market recovery or divest and shift into cash? The ‘what-if’ questions are often the most unsettling. It is important to remember that the reduced risk achieved through liquidation could also mean locking in losses and not being able to benefit from any upswings that could have offset the original volatility losses. 

Meanwhile, those who have already retired but remained invested could consider mitigating the impact of volatility by temporarily reducing their withdrawals. Doing so could allow their portfolio to recover by not reducing the overall pot any more than necessary.

In any case, the quality of the adviser and a positive, proactive approach are key. A good adviser will take the time to explain all the possible ramifications of a given course of action in a way that the investor can understand. Indeed, with Consumer Duty coming into force in July 2023, advisers now have a duty of care to their clients. They will then have to go beyond mere compliance and, instead, adopt a holistic service approach that ensures clients are treated fairly. This leads to better outcomes and generally provides a more solid foundation for better customer support and experience.