Coronavirus spooks markets – what does it mean for pension funds?
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The Covid-19 epidemic – which has now reached all inhabited continents – looks like it is turning into a pandemic, and markets are going into freefall territory, if you ignore the small bounce today.
As the UK government decides to hold a Cobra meeting about its response to the virus today, Italy has quarantined 12 towns and France and Switzerland have issued bans on large gatherings.
The virus is expected to impact supply chains for tech and other sectors, and so the market response is one of ‘sell, sell, sell’. On Friday, a week of losses had been recorded on stock markets. News reports abounded of the Dow Jones having had its sharpest drop in history, and the week having been the worst for shares since 2008. It looks like the feared correction is here.
Janet Yellen, the former chair of the US Federal Reserve, said it was conceivable the virus could plunge the US into recession.
Consulting firm Mercer however still expects global economic growth to return to trend over 2020 and 2021, “albeit with higher downside risks than previously anticipated”, adding that equities could fall further if the disease becomes a global pandemic.
But it believes that “equity market investors should look beyond short-term economic disruptions, and the downside could be cushioned by any monetary policy response” - which is what capital markets have learnt to rely on whenever growth started to look uncertain, and it looks like that is what has happened today.
Virus prompts covenant questions
The new virus will prompt questions about the sponsor covenant for many UK schemes. For others, for example in the pharmaceutical sector, it might represent a possible improvement – but they may want to bear in mind that Pandemrix, GlaxoSmithKline’s vaccine against the swine flu of 2009-10, ended up backfiring on the company after it turned out to have led to an increase in cases of narcolepsy.
Investment-wise, the ‘long-term investor’ stance advocated by Mercer might be right for DB trustees. Invesco also says it is confident that policy support will be adequate and thinks the economy will “snap back” as the contagion stabilises, even though “there may be some pain before the situation improves”.
But while DB schemes may be able to sit it out and are, in any case, more derisked and better protected against equity market falls now than they were during the financial crisis – how will DC schemes fare?
Should they communicate with their scheme members – most of them in equity-heavy default funds – and tell them, ‘Don’t panic’? Would this amount to investment advice? And could it result in the opposite of the desired effect – people noticing that their investments have lost value and moving their assets?
Should pension schemes discuss the virus with their members? And how many have started discussing it with their sponsors?