Five to ten years ‘reasonable’ for pension coronavirus recovery

Professional Pensions reports...

Savers with less than a decade to go until retirement have a reasonable timeframe ahead for their pension to recover from the market instability caused by the Covid-19 coronavirus, according to Unbiased.

The adviser directory website confirmed that could be the case if savers took immediate action to increase contributions, while employers could then do the same to match rates.

It said: “[Savers] should consider increasing pension contributions with each one boosted by at least 25% thanks to the tax relief.

“A defined contribution (DC) fund usually achieves growth over the long term, but in the short- to mid-term, its value can fluctuate wildly due to booms and busts; [the] coronavirus came along and the markets suffered their second-biggest loss of all time.

“If savers’ retirement is only a few years away – the effects could be more noticeable.”

This comes as 10-year duration UK gilts collapsed to a new all-time low of 0.5% earlier this month amid a host of market crashes throughout March – although they have since recovered slightly.

RisCura head of research Faisal Rafi told Professional Pensions the “big question” for DC schemes is exactly how much damage will be done before an anticipated market settle down in spring.

He said: “At this stage no one is expecting significant impact on the long-term prospects of companies although it really depends on how long the effects of this virus will remain and the damage it causes to global GDP.

“Weaker companies may fail so there will be some permanent damage; market values of equity funds have been volatile and continue to be so.”

Unbiased added: “The coronavirus has caused misery across the planet, claiming many lives and putting thousands more in hospital and a less tragic, but just as real a problem has been its impact on global stock markets as these falls in the FTSE and Dow Jones indices impact anyone with pension savings.”

Pension scheme portfolios with heavy equity exposures also run a risk of leaving retirement pots “lower than expected” for savers with less than five years until retirement.

Schroders head of research and analytics Duncan Lamont added that while some funds are in a stronger position – for example if they hedged interest rate exposure  – most funds are likely “in a far worse situation than contemplated a matter of weeks ago”.

He added. “Unless things improve dramatically, there are going to be some very difficult funding discussions in the coming months. Demands could increase for sponsors to pay in additional contributions.

“This could come at a time when sponsors are already under severe stress as a result of the coronavirus-induced economic slowdown.”