Will DC pensions become a victim of Covid-19? 

Pardon the Interruption

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So we now know that GDP has contracted by 2% in the first quarter, the most since Q4 2008 – despite that quarter including just a single week of lockdown – while the job retention scheme has been extended by four months (though the extension seems to exclude the self-employed). 
Some would say the JRS is artificially keeping jobs alive that are effectively already dead and will be axed as soon as the scheme ends. What is clear is, the next few months and years are not going to be pretty.  
In the US, unemployment has skyrocketed to nearly 15%, a level not seen since the Great Depression, and queues at foodbanks speak of the lack of savings and support.  
Yesterday, chancellor Rishi Sunak was asked by BBC political editor Laura Kuenssberg if there was any way a recession could be avoided. Shaking his head slightly, he appeared to be looking for a way to soften the message by saying that "this is going to have a very significant impact on our economy”. In other words: ‘No, there isn’t’. He later admitted that a significant recession lies ahead.
The question then is, how ready are individuals, businesses and investors to withstand the economic shock that will hit most of them sooner or later? 

Around 6m people in the UK (18% of the total workforce) have already seen their hours cut, been laid off or made redundant, and 38% have lost household income because of the crisis, with nearly 8% losing 80% of their household income or more, according to Citizens Advice.   
Looking at individuals, financial resilience is low in the UK, where just over a third of households are financially secure, compared with two-thirds in a country like Norway, according to research by YouGov for the Standard Life Foundation

Source: YouGov/Standard Life Foundation
In the UK, 21% have accessed some form of savings in the past few weeks. A similar percentage (22%) of people have no savings. Few will have the three or even six months’ of outgoings in the bank that are advised as a rule of thumb; the 1.8m applications for Universal Credit between mid-March and late April speak to that fact. 

Pensions become savings pot of last resort

In countries where savings levels are low, pensions could suddenly come to mind in this crisis. The US and Australia are even encouraging the use of pension savings for short-term expenses by relaxing access restrictions to DC pots.  
“It's a generalisation, but the evidence in the US is, we are starting to see people take drawdown from 401k plans,” says Mark Sullivan, global practice leader of benefits consulting at Fidelity Investments. 

In the UK, one in 10 (11%) over-55s with a pension has either already accessed or plans to access their retirement pot earlier than anticipated as a result of Covid-19, according to an Opinium survey conducted in late April. 
Even people who do have savings cannot withstand a period of joblessness and lockdown forever. “Resilience can only last so long,” notes Sullivan, but points out that the UK has social security, which is missing in other places. “One of the differences is there is a social safety net, it’s low, but at least there is something.” 
However, the fact that social security is as low as it is contributes to the high number of those in the UK who are exposed financially compared with our European neighbours.
The current environment brings home the idea that long-term saving – for retirement – can only be sustained where a majority of people have buffer funds for short-term shocks, which would require a move away from the current low-wage economy. Given the levels of unemployment ahead, this seems unlikely. 
For employers, thanks to various contribution easements, pensions, particularly DB pensions, are currently a financial pressure valve that enables them to redeploy cash where it is needed most urgently. A few have reduced employer contributions to DC schemes; it remains unclear if they will go back up to previous levels. 
Once the recovery begins, HR strategies might not prioritise pensions. Instead, employers might want to understand where staff need immediate assistance, be that debt advice or mental health support. Pensions could thus become part of a much broader wellbeing strategy. 
But no amount of helplines and therapy will make up for the fact that low pension contributions will lead to lower retirement incomes. With employees unlikely to be in a frame of mind to think about this, should DC trustees bring it up with the employer once the dust has settled – and should they think about a sidecar model? 

Should trustees ensure DC contributions return to pre-Covid levels once the recovery begins? 

Steve Delo
Michael Clark
Rona Train
Brian Henderson
Gregg McClymont
Caroline Escott

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