Toxic side effects of coronavirus weaken global pension systems

Toxic side effects from the coronavirus pandemic will cause further damage to the world’s pension systems, which are already struggling to cope with ultra-low interest rates and escalating financial pressures, according to a new study.

Pension funds fear that many economies will manage only disappointing, stuttering recoveries after the crisis and that inflation will surge as a result of the massive emergency monetary measures introduced by central banks to stabilise financial markets, the research found.

“Pension funds are really worried. Covid-19 has ravaged funding ratios for pension systems across the world,” said Amin Rajan, chief executive of Create Research, the consultancy which questioned 158 retirement plans across 17 countries that together manage assets of €2tn.

Nine out of 10 of the pension funds warned that they expected investment returns to be lower in the current decade than the last and three-quarters expected inflation to increase.

“The only way to shrink the global debt mountain is to inflate it away,” said one US pension fund executive, who declined to be named.

Governments and central banks have been forced to work in tandem to deliver help to businesses and households affected by the pandemic.

More than 80 per cent of the pension funds surveyed by Create said they expected a weakening of central banks’ power to boost asset prices. Instead, governments would assert more control over monetary policy, they said.

“We may well witness the reversal of a long process that has resulted in investment returns being far more influenced by central bank actions than by the state of the real economy, said Pascal Blanqué, chief investment officer at Amundi, the €1.6tn French asset manager that sponsored the research.

The uncertainties resulting from coronavirus have sharpened pension funds’ focus on building greater resilience to future crises and preparing their portfolios for a range of post-pandemic scenarios, said Mr Rajan.

“The pandemic has vividly shown how physical shocks can roil the markets and whipsaw pension plans in ways that were previously unimaginable,” he said.

Cuts in dividend payments and reductions in interest rates during this year have further weakened the funding position of defined benefit pension plans, which pay a guaranteed income in retirement.

A third of the DB schemes surveyed expect to have to reduce retirement benefit payments because of their weak funding position. Just under half said they would need their plan sponsor to make additional financial contributions even though cash flows have shrunk for many companies and organisations during the pandemic. 

“The harsh truth is that DB promise was easy to make but hard to keep in an era of low interest rates. Plan sponsors can only chip away slowly at retirement benefits to contain their ballooning obligations,” said Mr Rajan.

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