Pensions have weathered the Covid storm
AT LEAST there is one less thing we have to worry about – after years of turmoil our pensions have come through the Covid 19 crisis pretty well.
Pension funds have been lifted by strong performances in global equity markets – up by around 12% – and Eurozone government bonds rising 5%.
Members of defined contribution (DC) pension schemes – the most common type – have seen increases in the value of their retirement pots due to the strong performance of global equities.
‘2021 has begun with significant volatility in individual stocks, evidenced by the well-publicised “short squeeze” on GameStop shares and other stocks.
‘But pension fund accounts are long-term investment vehicles that should benefit from holding firm through market volatility.
‘2020 illustrated the difficulty in trying to time market events and the benefit of not making kneejerk decisions. The fall in equity markets in March was swift and unforeseen and so, too, was the rapid recovery in market values driven by policy decisions,’ says a new analysis by pension fund experts Mercer.
Those members who held fast through this period (as pension holders generally do) will have fared better than those who sold after markets fell and potentially missed the market rally.
Diversification and long-term planning are also key to good pension performance and most company pensions achieve these goals.
The other type of pension is called a defined benefit (DB) pension and this used to be the gold standard for retirement incomes as it guarantees a set proportion of your income every year.
However, these guarantees proved difficult to live up as stock market returns and financial crises devastated returns and many DB schemes struggled to meet their obligations in recent years, racking up a massive collective deficit.
The good news is that Irish defined benefit (DB) pension scheme deficits ended 2020 at similar levels to 2019 despite a year of turmoil caused by the Covid-19 pandemic, according to Mercer.
Although deficits remain largely unchanged over 2020, this does not tell the full story of a rollercoaster year for pensions despite.
Yields from corporate bonds – a form of long-term loans to
companies – at first fell before spiking dramatically later in the year, reducing pension scheme liabilities. Shares plunged in value as Covid hit and were down 13% in March – resulting in an overall deterioration in funding levels.
The remainder of the year, however, saw Covid-19related fears reduced as huge stimulus packages were announced by major governments across the globe.
As a result, deficits at the end of 2020 remained in line with the beginning of the year.
Overall, Mercer estimates that the cumulative DB balance sheet deficits for ISEQ-listed companies was circa €1bn at the end of 2020.
‘2020 has been an exceptional year, but pension deficits on company balance sheets have weathered the storm,’ said Peter Gray, corporate consulting leader, Mercer. ‘That said, the experience in March demonstrates the volatility inherent in defined benefit schemes.’
Pension fund trustees are mainly concerned about their scheme’s ongoing funding level and ability to satisfy the statutory solvency test, rather than the pension deficit on the company’s balance sheet.