Aon has said that the actuarial valuations of a quarter of UK defined benefit (DB) pension schemes are likely to be badly impacted by the recent COVID-19-related disruption to financial markets.

Using its Risk Analyzer tool, Aon has reviewed the movement in funding levels of 190 pension scheme clients since their last valuations in the spring of 2017. The analysis shows a very diverse range of experiences.

While the last month or so has been challenging, overall across the last three years, the consultancy found that a quarter of schemes were likely to have seen an improvement in funding level, but half of schemes would have seen anything from little or no change to a 6% worsening in funding levels.

Aon said the remaining quarter of schemes’ funding levels would have fallen by more than 6% due to market conditions.

For a typical pension scheme with a liability value of £250m (€280m), a 6% worsening of funding level corresponds to deficit increasing by £15m, it added.

Matthew Arends, head of UK retirement policy at Aon, said: “Actuarial valuations with effective dates on 31 March or 5 April 2020 will be anything but repeats of 2017 valuations, given the impact that COVID-19 has had on pension scheme funding and sponsor covenants.

“And this is despite, in many cases, significant deficit contributions having been made over the last three years.”

He added that the degree of impact of COVID-19 on scheme sponsors has also been “very mixed”.

“Some sponsors have seen little impact so far, whereas others are badly affected, restricting the affordability of pension contributions,” he said, adding that the priority for schemes should be “to understand their specific circumstances – of both the scheme itself and of the scheme sponsor”.

“Only then can they determine the appropriate actions for their particular scheme.”

Matthew Arends at Aon

Matthew Arends at Aon

Aon said the actions and aolutiona open to schemes range from gaining clarity over the covenant strength of a scheme sponsor, taking stock of the options available for recovery plans, and reviewing potential investment options.

Arends said: “When it comes to measuring covenant strength for spring 2020 valuations, relying on the process from 2017 isn’t going to work.

“Instead, there may be merit in forming a provisional view of covenant strength but waiting for a few months to monitor the actual progress by the sponsor before finalising the view.”

“These are exceptional circumstances, so it will not only be funding plans that are affected – sometimes significantly so – by current events,” he continued.

He said that this is a time to review long-term funding and investment plans as well. “Schemes’ existing plans may now look overly optimistic and simply not suited to the environment we are experiencing and expect to face in the short to medium term.”

Barnett Waddingham on inflation and DB schemes

As the UK’s inflation rate, CPI, fell to 1.5% in March from 1.7% in February, Ian Mills, principal and senior investment consultant at Barnett Waddingham, has highlighted the positive impact of low inflation rates on final salary pension schemes.

“The dip in the CPI inflation rate to 1.5% could be a precursor of lower inflation to come. The COVID-19 crisis is already having a huge impact on the economy and it’s inevitable that this will feed through to consumer prices.”

He added that there could well be further falls in inflation in future months, “but while the nation remains in lockdown and market volatility persists, the lower inflation rate may warrant a glimmer of hope for the funding levels of some final salary pension schemes”.

“If the lower inflation rate is sustained, it will ease the pressure for some DB schemes with sizable deficits,” he said, adding that employers of such schemes could then see the value of their liabilities drop, “offering a window of opportunity for struggling schemes to address their deficits and edge closer to their endgame”.

For pension funds that are already in the process of de-risking, a lower inflation rate may accelerate the drive to make buyout a reality, he said.

Mercer launches Financial Wellbeing hub

Mercer has today launched a complementary Financial Wellbeing resources hub to assist employers and their staff and pension members through challenging times brought on by COVID-19.

The hub’s website, which provides practical information for employers to help their employees maintain their financial wellbeing, also includes an associated site with toolkits aimed directly at individuals.

Both sites and all the resource within are free to access for employers, employees and their friends and families.

The employer resource site will see regular updates on current and emerging best practices in financial wellbeing benefits and approaches.

Mercer will also regularly post expert commentary and information around evolving government and financial institution assistance measures relevant to employers and their employees.

The employee tool-kit site offers videos, podcasts and articles with practical financial information, money saving hints and tips, checklists and planners, and links to other useful association and government sites providing support and information.

Sylvia Pozezanac, Mercer’s UK CEO, said: “Many organisations have been focusing on the immediate business and employee health implications of the coronavirus. As the economic impact of the pandemic comes to the fore, the short and long-term financial wellbeing of employees is now rising up the agenda.”

She said that many companies like Mercer are “well aware that many families rely on incomes now affected by the many businesses impacted by COVID-19”.

“Drawing on our own approach to financial wellbeing, as well as the personal experience and expertise of our colleagues across our business, we have created this hub of information to support and give back to our clients and their people.”

A Mercer spokesman confirmed to IPE that Mercer’s own Master Trust also provides its own members with access to the hub.