Industry must keep member confidence strong through slowdown

In the short term, a significant downturn is likely to be postponed by accommodative monetary policy in the UK and eurozone, and expansive fiscal policy in the US.

But pension schemes must be aware of the growing risks and be prepared to act should conditions warrant it.  

Inclement weather during March saw the country come to a standstill and economic output slow almost to a halt; Purchasing Managers' Index survey figures suggested economic activity grew at its slowest pace since the EU referendum.

We must do what we can to ensure that people do not lose faith in the value of their pension

The hard data published by the Office for National Statistics supported these weak figures, reporting that GDP growth had fallen to 1.2 per cent year-on-year during the first quarter of 2018, the weakest level since 2012.

The April and May PMI figures strengthened compared to March, but the recently released estimate of GDP growth for the three months to May 2018 suggests output remained weak, with the economy expanding by just 0.2 per cent over the period.

The lack of a strong ‘bounce back’ has raised concerns that the business cycle has peaked and a recession may be imminent.

UK is not alone

Economic data from elsewhere in the developed world has also started to indicate that we may be entering a period of cooler output growth. European PMIs have declined sharply from their (albeit unsustainably) high readings at the turn of the year, although the figures allude to a far healthier level of growth than the UK and are not yet indicative of a recession.

In the US, while growth figures remain robust, inflation is becoming elevated; this will compel the Federal Reserve to raise interest rates further to curb inflationary pressures.

Expectations of higher future interest rates have the effect of ‘flattening’ the yield curve; with yields at the shorter end rising in relation to those at the longer end until the curve ‘inverts’.

This is often a sign that a recession may be imminent. In fact, curve inversions have forecast all nine recessions in the US since 1955, making the shape of the yield curve an impressively accurate economic indicator.

Cheap assets are hard to find

Another indication that we may be on the cusp of a slowdown is the elevated nature of equity prices; many developed markets are at, or near, record highs.

A decline from these record highs could precipitate a slowdown as corporates react to tighter financing conditions and expectations of weaker sales.

However, while there is increased likelihood that a slowdown may be imminent, policy actions by governments and monetary authorities may provide some respite.

Firstly, monetary policy remains accommodative in both the UK and eurozone. Although the Bank of England is expected to raise interest rates this summer, it is unlikely to signal a tightening cycle; in fact, the BoE is itself only forecasting interest rates to rise by 75bps over the next few years.

The US tax reform bill of 2017 saw US corporation tax slashed from 35 to 21 per cent in December, and while this is likely to defer any slowdown in the short term, the probability that the economy overheats has likely increased, with interest rates having to climb faster than otherwise planned, potentially pushing the economy into a more significant downturn.

Member comms are essential

With this ongoing backdrop of possible doom and gloom on the horizon, pension schemes should ensure that member communications around market jitters and falls are up to date and accessible, and that answers are readily available to any questions members may have in the event of a downturn.

If the worst happens, we must do what we can to ensure that people do not lose faith in the value of their pension as a long-term savings vehicle, even if investment returns veer slightly off course.

Matt Tucker is an investment analyst at Quantum Advisory