PROTECT YOUR PENSION

How to limit the risks of fallout caused by coronavirus,

THE ongoing Covid-19 crisis has been of huge concern to pension holders. Trillions were wiped off world stock markets in February and March as panic about the coronavirus spiralled — leaving many pension funds nursing heavy losses. Furthermore, the job losses triggered by the emergency — as well as the devastating consequences of the pandemic for many employers — has left a lot of people unsure where they stand with their company pensions or worried about the impact of their employer’s financial woes on those pensions.

So how should you handle the biggest risks posed to your private pension by the current crisis?

STOCK MARKET FALLS

Although stock markets still have their ups and downs — and are likely to continue to do so in the coming months and years — they have started to recover since the Covid-19 crisis. So the worst of the stock market falls may be behind us.

Your pension is typically considered more vulnerable to stock market volatility if you are a member of a defined contribution (DC) pension scheme rather than a defined benefit (DB) scheme. This is because the pension you get through a DC scheme largely depends on how much you have saved into the plan — and how well that money was invested. Your age around the time of any stock market falls also comes into play.

“If you are between 20 and 45 and invested in equities, you can’t draw down your pension for at least another 20 years anyway — so as long as you do nothing, when stock markets do correct themselves, you’ll get the bounce back,” said Peter Griffin, director of APT Workplace Pensions.

You crystallise the losses in your pension fund if you cash in equities when stock markets are falling — and you also lose the opportunity for your fund to make those losses back for you. It is also likely to cost you more to get back into the stock market if you sell during a crash — and then decide to invest in stocks and shares when recovery sets in later on. “The worst thing anyone can do is sell at the wrong time,” said Griffin. “Even if the underlying assets you own have fallen in value, the number of stocks and shares you own won’t have fallen in value — so you won’t have lost anything [as long as you haven’t sold or cashed in]. You’ve only lost the paper value.”

Those who are close to retirement don’t have as much time on their side to make up for any recent losses in their pension fund as a younger person does.

“However, if you are almost 65, your pension shouldn’t have been exposed to the type of shares which fell substantially recently, due to the Covid-19 crisis,” said Griffin.

Most DC schemes have a lifestyle strategy in place — where your money is invested in risky assets when you are young and moved into less risky investments as you approach retirement.

“As long as that path is being followed, there shouldn’t be a massive problem [with your pension as a result of Covid-19],” said Griffin.

“However, you definitely need to derisk (reduce the investment risk in) your pension fund if you are 65 or over and your pension is 100pc invested in equities. Similarly, if you are very risk-averse and are now coming close to retirement, and are looking to draw down your pension over the next 12 to 16 months, perhaps now is an opportunity to derisk your pension fund — and to move into less volatile investments. If there’s a second bout of Covid-19 in the autumn and, as a result, the opening up of the economy takes longer than people are hoping, we could see a reduction in [pension] fund values again.”

The level of risk associated with the funds which you can invest your DC pension in varies from one to seven — with one being the lowest risk and seven the highest. “For most default pension investment strategies, people should be invested in a fund with a risk rating of around four — or if more optimistic, a five,” said Griffin. “If you’re close to retirement, a risk rating of three is typically where you need to be.”

A low-volatility investment fund is an option for you if you are close to retirement and derisking your pension fund, advised Griffin. Cash funds tend to be the safest investments but such funds deliver little, if any, returns so it is unwise to be invested in them for too long.

BOSS’S STRUGGLES

One of the main perks of a company pension is that an employer will often contribute to the scheme on your behalf — making it easier for you to build up a reasonable pension pot. However, the current crisis may mean that your employer cannot currently afford to pay employer contributions into your pension.

There is no legal obligation on an employer to set up or contribute to a pension scheme. “An employer can suspend employer pension contributions if it needs to,” said Griffin.

Understand the impact which any suspension or permanent cessation of employer pension contributions could have on your pension — as you may need to save more into the scheme to make up for the loss of employer contributions throughout the crisis (as well as the loss of your own contributions if you too stopped saving into your pension during the crisis).

“The biggest issue [emerging from this crisis] will be the employer’s ability to contribute to a company scheme or to continue the scheme,” said Jerry Moriarty, chief executive of the Irish Association of Pension Funds (IAPF). “That is likely to be a bigger issue for DB schemes than DC schemes. There may be employers looking to suspend employer contributions to company pension schemes as a result of the Covid-19 crisis.”

TEMPORARY LAYOFF

Many of those who have been laid off temporarily are not paying contributions into company pension schemes while off work. This may create issues around death-in-service (DIS) benefit (a tax-free lump sum which is paid by your employer if you die while employed by the company). So if DIS was one of your work perks prior to the pandemic, check if you are covered for DIS while temporarily laid off and on your return — and if your DIS benefit covers you for Covid-19-related death and illnesses. “Check with the employer or pension scheme administrator what the position is on DIS benefit,” said Moriarty. “Check if employee pension contributions are linked to the DIS benefit.”

It is up to pension scheme trustees to consider if DIS benefits provided to members will continue during Covid-19-related leave, according to Gerry Stewart, partner with Fagan & Partners. “This will normally depend on the employment status of the individual member and will normally need to be discussed with the employer,” said Stewart.

“Most DIS benefits are based on a member’s salary level. The policy documentation relating to DIS benefits should be reviewed by the trustee and the insurance company providing the benefits so that an agreement on the chosen

level of insured benefits can be reached under the policy terms during the period of Covid-19related leave.”

PERMANENT LAYOFF

You have a number of options with your company pension if you have been made permanently redundant. Should you be a member of a DC scheme, you can either opt for a preserved pension arrangement (where you leave your pension in the scheme until you can access it in retirement); transfer your pension to your new employer’s scheme (if and when you find a new job and your new employer offers a company pension) or to a personal retirement bond (a type of personal pension); or if you are over 50, you can access your pension early.

You won’t have the option of a preserved pension if your employer goes bust. “It is likely that the DC pension scheme will have to wind up if your employer goes bust,” said Griffin. So in these circumstances, your pension would be either transferred by the scheme’s trustees to a personal retirement bond or, if you are over 50, you have the option of accessing your pension early, advised Griffin.

With a DB scheme, you have the option of a preserved pension if you are made permanently redundant — as long as the scheme is not wound up. “You may possibly also have the option of a transfer value (cash equivalent value of the benefits you have built up in the scheme) in lieu of the pension — depending on the funding position of the scheme,” said Griffin.

Should a DB scheme be wound up, the pension paid to you will largely depend on how well or poorly funded the scheme is. You may be able to access a DB pension early if you are over 50 — though this is at the discretion of trustees and again the benefit paid will depend on the funding position of the scheme.

Remember, whatever issues you face throughout this crisis, your pension is likely to be one of your most valuable assets. So it is very important to stay calm and make the right decisions about it.