A poorer retirement is pandemic’s hidden legacy
Workers will need to live with lower returns from their pensions
The editorial board
© FT Montage
Job security is the immediate concern for workers everywhere as they worry whether they will still be in employment in the post-Covid world.
The health and economic crisis has sent unemployment soaring as employers have cut costs and jobs.
Yet the pandemic has also brought a nasty hidden legacy for millions: the retirement many had been saving for will be far less comfortable than they thought.
Central banks’ action to stimulate economies and keep interest rates low have made it harder for pension funds to earn the money to pay for their members' retirement. At the same time one of the biggest sources of income for funds and individual savers, corporate dividends, has dwindled alarmingly.
Some equity markets are still well down on their pre-Covid valuations, again hitting the value of savings. Those with corporate pensions who have lost their jobs will also be losing their employer’s contribution to that pension, while some schemes are warning struggling companies are skipping payments into their schemes. Everywhere, workers face the prospect of retiring on less or working longer.
The crisis has come at a particularly difficult time for the pensions industry, which is already under pressure from a decade of low interest rates and low bond yields. Experts had already warned the retirement savings gap — the shortfall between what people currently save and what they need for an adequate standard of living when they retire — would balloon over the next three decades.
The crisis is especially acute for corporate and public sector “defined benefit” pensions which promise members a specific payout. Many companies had already closed schemes to new entrants but the crisis could prove the death-knell for them as businesses focus on their own survival.
There are no easy policy responses to the growing crisis. In Australia, where the government has allowed members early access to their pension superannuation funds, the result has seen some 600,000 people — most of them under 35 — wipe out their savings altogether.
It is something policymakers in the UK should bear in mind as the furlough scheme, which has helped pay 80 per cent of the wages of some workers, ends in October. People must not be driven to raid their pensions. Regulators must also be alert to people chasing ultra-high risk assets in a bid for higher returns.
In the US, the government has rightly allowed employers some breathing space on contributions to schemes to help them deal with their own cash crisis. In the UK, the regulator similarly eased its rules in April but its longer-term drive to get schemes to pay down their deficits faster looks questionable in the current environment.
Guaranteed schemes have been pushed towards low-risk — and low-return — assets over the past decade, an approach that has accelerated the decline in the value of many pensions. In 2006, such schemes had more than 60 per cent of the investments in equities.
That fell to just 24 per cent by 2019. Schemes need support in the current crisis, not to be hamstrung by an overhasty push for self-sufficiency.
The harsh reality is that in the area of retirement savings as in many areas of life, coronavirus has brought longstanding problems suddenly to the surface. Those wanting a comfortable retirement will simply need to squirrel more away — but governments and regulators should make sure that obstacles to their doing so are removed, and that nothing is done to precipitate a crisis in the structures that look after their current retirement savings.
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