COVID-19: Impact on Pension Obligations

The COVID-19 outbreak caused considerable turbulence in financial markets and has also affected insurers in many areas, including more volatile asset prices, lower interest rates, wider bond spreads and increased defaults, as well as challenges relating to client retention, efficiency and operational risk. Coupled with the current uncertain economic climate, this is putting the funding of pension obligations under considerable pressure. Against the backdrop of the wider economic impact of lockdown and the need for short-term liquidity, some companies may struggle to maintain their pension contributions. Coronavirus will put pressure on occupational pension provision in the short and medium term.

This pressure does not stem from a change in longevity, as coronavirus-related deaths have no statistically significant impact on the life expectancy trend. The key factor affecting pension obligations is the discount rate. Under IAS 19, this must be determined by reference to yields on high-quality corporate bonds whose term and currency match those of the pension obligations. For a duration of 15 years, the discount rate has fallen from around 2.0% p.a. in 2018 to around 1.0% p.a. in 2020. Several companies have had, or will have, to reduce their discount rate substantially at the reporting dates of 31 December 2019 and 31 December 2020. Projections and sensitivity analyses can be carried out to illustrate market fluctuations. Assumptions such as inflation, salary growth and staff turnover should also be critically reviewed. Actuaries play an important role in these processes, providing input on the current and projected effects of the crisis and enabling a range of possible scenarios to be considered.

Another factor affecting pension obligations during the coronavirus pandemic is short-time working. Companies for which this is relevant should clarify how short-time working and any employer top-ups to statutory short-time working benefits affect occupational pension contributions under defined contribution arrangements, or benefit levels under defined benefit arrangements. Employees and employers should be informed of any implications for risk cover and work with occupational pension advisers and actuaries to find solutions. 

In these volatile times, it is important to stay one step ahead of financial surprises. Employers, together with advisers and actuaries, have a responsibility to analyse these risks and assess alternative courses of action.