Stock markets around the world pulled back on news of a 'blue wave' sweeping the United States in this week's midterm elections, with investors fearing the AI expansion era could end after a number of Democrat candidates campaigned against data centres. 

Concern that tech shares were in bubble territory and a crash was a matter of time have abounded for some time, but it is still unclear if Thursday's sell-off will continue in the weeks ahead. Futures markets reportedly suggest that Wall Street will have calmed down when it opens later today, but stocks will likely remain volatile.  

Given the concentration of global markets in the US, and in large tech companies in particular, a downturn affects many if not most defined contribution savers in the UK – who may see their nest eggs exposed for the first time, following two decades in which stock markets tended to rebound quickly.  

Matt Tickle, chief investment officer at Howden Employee Benefits, does not expect this latest shock to be long-lived as the Democrat win was expected, even if its scale was not. 

 

The stock market falls feel severe because of recent rapid gains, he believes. “We currently see this as a correction rather than the beginning of a prolonged bear market," he said. “Although the movement is material and will understandably concern pension savers, it remains well within the range of normal equity market volatility." 

 

Tickle said on the whole, workplace pension default strategies are well diversified but the precise level of diversification will vary between schemes, so trustees should assess whether their default strategy remains appropriate. 

  

The behaviour of DC members will not change because of this latest shock, he predicted, but trustees should explain that falls in fund values do not necessarily mean members should change investments, with younger members being able to ride out volatility, while those nearer retirement could be reminded that they do not need to take their pension out in one and encouraged to take advice. 

  

  

Much will depend on whether the current rout deepens, however. “The position could change if the downturn developed into a deeper and more prolonged bear market, comparable with the dot-com crash. That could have a greater behavioural impact, particularly on younger savers who have not experienced a sustained market decline," he admitted. "It could also lead trustees and policymakers to look again at default-fund diversification, investment concentration, the design of derisking strategies and the support provided to members approaching retirement." 

 

For Christopher Mahon, head of dynamic real return in Columbia Threadneedle’s multi-asset team, the case for fundamental changes to DC investing has already been made. 
 
“Beyond the short-term post-election moves, it is notable that none of the equity sell-offs of the past few years has been accompanied by a sizeable bond market rally. For DC pensions, that should prompt a rethink of lifestyling,” he argued. "The approach worked well in 2008, but has offered far less protection since, while imposing a significant opportunity cost on savers.” 

Mahon's research estimates that derisking in the last five years before retirement cost about £12,000 on a typical £100,000 pre-retirement pot and could be larger if derisking started earlier, or if the analysis extended into retirement. 

  

“It is also one of the many reasons UK capital markets have been depleted of funds. If regulators want to see an alternative approach, they could look to Australia, where lifestyling is not the default, but a voluntary choice,” he said.  

For savers, the key thing is not to panic, said Anthony Ellis, head of DC trustee at Hymans Robertson. Like Tickle, he advises trustees to communicate clearly with members, putting short-term falls in the context of a savings journey that might last 30 or 40 years, and avoiding language that encourages people to make knee-jerk investment decisions. 

However, "the position is different for members close to accessing their savings, where sequencing risk matters much more and trustees should understand how effectively their default protects members as they approach retirement", he added. 

Ellis admitted that there is a question mark over what happens to DC in a prolonged downturn. "The right response would not be to retreat from investment risk, but to make sure members are taking the right risks, with genuinely diversified portfolios and a strategy designed around their long-term objectives," he said.  

The market change is also a useful reminder that diversification needs to be real, he said, not just by label. Last month, the Pensions Regulator published guidance for trustees on how to identify and manage concentration risk from potential hidden AI-related investment exposure.