Coronavirus – Cover story
market capitalisation. Examples include the retirement schemes for BT, Centrica and British Airways. The latter is, of course, particularly affected by the travel restrictions due to the Coronavirus. Early reports suggest that some sponsors are at- tempting to mitigate cash constraints by appealing to trustees for a temporary suspension of pension contributions, a policy which could free up much needed cash in the short term.
Riding the volatility
The short-term effects of stock market volatility will be even more severe for DC schemes’ investment returns as they are predominantly invested in passive equities. DC schemes for FTSE250 firms had on average 70% of their assets invested in equities, according to the Investment Association. The over- whelming share of these assets continues to be invested in pas- sive funds although in recent years some larger master trusts have been able to venture into alternative asset classes. At the same time, policy makers appear less concerned about the losses in DC funds, partly because the average member- ship for DC schemes is still young and partially because losses will be borne by individuals. For example, only 5% of Nest’s members are 60 years or older while 30-year-olds account for nearly a third of its savers. Mark Fawcett, Nest’s chief investment officer, warns members against sudden withdrawals in the current environment and urges patience. “Most Nest members are unlikely to experience
a long-term impact from shorter term market falls either be- cause they’re young enough to comfortably ride them out or because, if they’re closer to retirement, we’ll have taken steps to move their money out of the stock markets,” he stresses. One of the initial effects of the Coronavirus crisis could be that a further increase of automatic enrolment contributions is put on hold. Speaking in March at the PLSA conference in Edin- burgh, pensions minister Guy Opperman suggested that auto- matic enrolment contribution levels should be kept at 5% for employees and 3% for employers to help businesses and house- holds deal with the effects of the crisis. While The Pensions Regulator has so far stressed that employers are expected to “meet their automatic enrolment duties” despite the ongoing crisis, the government has neither confirmed nor denied a po- tential deferral of contributions.
The way forward
If China is past the worst, then in Q2 the economy might start to recover, but we need to be convinced of that. Gerard Lyons, an economist
The long-term impact of the Coronavirus crisis on the global economy and concomitantly its impact on UK pension schemes is still uncertain and depends on the ability of Western govern- ments to curtail the spread of the virus. While former Bank of England governor Mark Carney and Eu- ropean Central Bank president Christine Lagarde were careful to describe the events initially as a shock, rather than a reces- sion, four former top officials at the IMF have already warned that global economy is now in a recession. According to Ellison, remaining optimistic is now a necessity for investors. “There is a Monty Python sketch about no one ex- pecting the Spanish inquisition. Similarly, no one expects the Black Swan, no one expected a pandemic. And to prepare for such an event is expensive. So quite rightly, no pension fund did that. “I wouldn’t blame anybody for not preparing for this event be- cause it would have been too expensive and the risk would have been outweighed by the cost,” he adds. “The worst case scenar- io could be a lot worse, markets could halve again, the lock- down could last for a year, we might not find a cure, but we have to work on the assumption that things will get better, you can’t live your life on a worst case scenario.” Gerard Lyons, an economist, predicts that China’s provisional success in limiting the spread of the virus bodes well for the global economic outlook. “If China is past the worst, then in Q2 the economy might start to recover, but we need to be con- vinced of that,” he said in a speech at the PLSA conference. But since his speech, infection rates across major Western economies have dramatically exceeded those in China. The British government has joined many other countries in imple- menting major containment measures.
As the pace of infection rates in the UK overtakes those in Ita- ly, it appears unlikely that this gamble will play off.
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