Is COVID-19 threatening the UK Pension Industry?

With Coronavirus cases on the rise again, will the virus negatively impact the UK Pension Industry?

With Rishi Sunak announcing the furlough scheme will end at the end of October, this could lead to even more job losses in the UK with the Bank of England warning that up to 2.5 million people could lose their jobs by the end of 2020.  With this likely increase in UK unemployment, less tax revenue will be collected by the government.  Less tax revenue will reduce the amount the government can pay in state pensions, therefore, threatening income streams of those elderly people currently receiving money from the government in the form of a pension.

The pandemic has also brought so many extra costs to firms, which means employers are also contributing less to employee pension schemes.

One of the major fears for the industry is that, with rising unemployment, workers will begin to tap into their pension savings earlier than they otherwise would have.  This has the potential to cause a savings-investment imbalance as seen in countries such as Japan where the elderly population has no savings.

This poses the problem of reduced consumption and investment as the workforce will spend more money on caring for their parents or elderly loved ones. Accordingly, this has had widespread impacts on GDP growth within Japan with average GDP growth over the past 20 years at 0.9% according to data taken from MacroTrends.

Guillaume Prache from BetterFinance has said that the current economic conditions, as a result of COVID-19, and the emergency policies in place provide the “perfect mix” to destroy the long-term value of pension savings.

The virus isn’t only spreading in the public and consumer sectors, but also in the private sector where Pension funds are also feeling the impacts of COVID. 

Private Pension asset management companies invest their client’s money into low-risk securities such as bonds, which provide low returns. However, with world interest rates being so close to zero, this has caused a fall in the yields of these bonds and, accordingly, the income pension funds earn from these yields has to be reduced. Correspondingly, what will be interesting to see is whether these pension funds reallocate their capital into other forms of assets, such as property for example. 

If policymakers do not react in a bid to aid the pensions industry, then there will be a collapse of pensions for those who need them and rely on them. This will further injure the economy and have drastic measures on future generations as they suffer the impacts of the coronavirus.

Only time will tell if the pension industry is able to weather the COVID-19 storm, or whether government support is needed in an industry, which at the moment, is looking likely to fail.