Pension Funds are one of the largest players on international financial markets. According to the OECD, the global institutional pension funds of member and reporting countries exceeded US$46 Trillion, as of 2019. These assets are essential for channeling retirement contributions and financing retirement benefits. Therefore, it is crucial to meet the performance targets of pension fund investments and ensure financial security. In the contemporary world, establishing a sustainable retirement plan is a critical challenge that requires sound governance structure, sensible management, and a strategic approach to investing.
During these trying times of infamous COVID 19, pension plans have been experiencing extreme pressure. Global outbreak caused glaring turmoil on global financial markets, contributing to heavy economic climate and uncertainty. Major stock performance indices have plummeted, and the individuals and companies with pension fund investments in the market have faced a severe decline in their asset value.
Who bears the burden of asset devaluation?
Depending on the type of pension plan applied, the burden of asset devaluation can be allocated differently. In the case of Defined Benefit Pension Plans, that are relatively rare, even with financial losses employers have to continue the payment of contributions. Therefore, companies are liable to bridge the gap between realized investment returns and affixed pension payments. The value of financial loss incurred for the company depends on the investment portfolio. The Higher the risk of financial instruments, the greater shall be the burden.
With Defined Contribution Pension Plans, employers are not obliged to guarantee investment performance beyond legal return, thus employees are at greater risk.
How can companies tackle Pension Fund Challenges in the face of COVID-19?
Even throughout the hard times of the global pandemic, there is no need to panic. Low investment returns and interest rates should get back on track in the long-term. A great place to start with would be to carefully overview your expected rate of return on assets, actuarial calculations, historical assumptions and, discount rates. Make sure they are still applicable and valid. Your investment strategy should already have a long-term focus and possess the corresponding design for getting through difficult markets. You might require some short-term tactical measures. However, it is less likely to have a need for urgent and major changes.
How significantly is my pension pot affected?
The answer depends on how soon you plan to retire. If you are signed up for Defined Contribution pension plan and have at least some years until your retirement there should be less to worry about. In long-run, it is highly expected that markets will recover (as they always do after) and so will the value of your pension savings.
If you are close to your retirement age, your pension scheme will most probably be aligning with your plans and “Lifestyling” investments. Thus, your savings should be moved to less risky assets. In this case, the effect of asset devaluation will be considerably less. If Lifestyling is not the case, and your pension plan has been still investing in e.g. shares, you should consider taking lower income or retiring somewhat later, allowing markets recover and get back to the track.
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