UK Defined Benefit Scheme sponsors issue record numbers of profit warnings amid Covid-19
According to EY, 61% of defined benefit pension scheme sponsors issued profit warnings in the first 9 months of the year. The report also found that 23% of UK companies that have DB pension schemes, are concentrated on traditional industries which are particularly vulnerable to the current economic climate.
This could mean that many companies are unable to meet their contribution obligations. As we all know, almost all defined benefit schemes currently have a deficit, meaning the total value of their obligations outweighs the value of the assets in the fund. The pension deficit crisis has been ongoing for a number of years, leading to many companies recently stating their commitment to increasing the amount they pay into their schemes in order to reduce the funding gaps. With these companies now struggling financially, in reality that now seems unachievable for many of them.
To compound this crisis further, the nature in which these funds are typically invested will mean that they have struggled to grow their existing funds in the schemes over the last year. These schemes tend to have UK-centric weightings, meaning their exposure to the UK markets is high, and their performance will reflect that. In fact, the pension deficit grew by £3 Billion during the pandemic, led in part by low growth or losses in the scheme’s funds.
The tragedy of our current reality for retirees
Many people who were nearing retirement are now having to reconsider their time frames. 26% of over 50s workers have been furloughed or seen a pay decrease this year. 19% of these people stated they will now have to delay their retirement, and a staggering 38% of them stated that they now expect to work indefinitely. On average, those delaying retirement were expecting to work an additional 3 years, with 10% expecting an additional 5 years.
With the situation not looking like improving anytime soon, this pension crisis may only get worse. Volatility is an inevitability over the next few months regardless of the pandemic, with US elections and Brexit D day looming. Now, with many countries debating a second lockdown this uncertainty is only being compounded. Whilst volatility can bring opportunity for many investors, pension funds are less nimble and unlikely to be able to benefit.
Transferring out of a defined benefit scheme continues to be an attractive proposition for many. Whilst it may not mitigate the risks associated with being exposed to a volatile market, it can certainly mitigate the risk of your retirement benefits being slashed due to inadequate scheme funding, a prospect that is becoming increasingly likely for many.