The outlook for pensions amid the Covid-19 pandemic

As part of our series on the economic and legal implications of the Coronavirus pandemic, we take a look at the impact already evident in pension investments and the measures that employers and trustees can take to safeguard their assets as much as possible in a very uncertain economic climate.

The impact on pension schemes so far…

Defined benefit pension schemes

In the space of a week, a UK defined benefit pension scheme had losses of circa €110 billion, which took solvency deficits to around €550 billion. As this virus continues to spread it is predicted that it could cause solvency losses to double in size. Ireland is likely to suffer a similar fate to the UK, although this will be reflective of the smaller market that exists here.

Increase of Annuities

The demand for bonds has increased as the virus spreads throughout Ireland, due to falling of stock markets. Yields are now falling, and bond yields support annuities, as yields fall the cost of purchasing an annuity, as a secure retirement income, increases. This is causing added pressures for individuals approaching retirement who are interested in purchasing an annuity.

Temporary lay-offs and contribution obligations

Many employers have decided to close their businesses during this uncertain period and therefore employees may be temporarily laid off. It is important that employers establish what obligations arise regarding the continued payment of pension contributions during this period of temporary lay-off. Employers must consider all applicable legislation and pension scheme rules before reaching a conclusion. Employers must bear in mind that any decision made in relation to this must be effectively communicated directly to each employee affected as well as the administrators of the scheme who are responsible for implementing any such decision.

It is, of course, worth remembering that pension saving is long term. People save for up to 30-50 years and while it is advisable for employers to closely watch current events, the focus should really remain with the long-term objective.

Employers and pension scheme providers should consider the following to mitigate against the financial consequences of the Covid-19:

• Employers who have temporarily laid off staff should review pension documentation and consider whether it is permissible to temporarily cease the payments of pension contributions during this uncertain period.
• Employers/trustees should have appropriate monitoring and contingency plans in place and be aware of risks that would have a significant consequence for their scheme, members and employees. This would usually include having a business continuity plan in place which sets out what actions would be taken if certain events arise that would affect the running of schemes. Trustees should also understand their service providers’ business continuity arrangements.
• Employers/trustees should reconsider plans they have in place for their schemes and extend timelines to meet their strategic objectives.
• Employers/trustees should interact with pension scheme administrators to safeguard vital scheme services in the event the crisis deteriorates.
• Trustees of defined benefit schemes should carry out assessments on the employer funding covenant to assess options should cash flows weaken.
• Actuaries and investment executives should carry out assessments to ensure scheme investments are insulated against the full financial effects of the virus.
• Ideally, meetings should be held by way of teleconference/skype to avoid social interactions during this crisis. Scheme documentation should be reviewed to determine if such meetings are acceptable.

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About the Author, Marc Fitzgibbon, Senior Partner, The Employment Team.