Covid-19 hikes deficits by £100 billion in week one

The market volatility caused by the outbreak of Covid-19 added £100 billion to the deficits of the UK’s defined benefit schemes in just one week, according to analysis by Hymans Robertson.

The downturn in global equity markets had taken solvency deficits to around £500 billion and if the spread continues could cause a macroeconomic shock, which has the potential to double solvency deficits to £900 billion, the pensions and financial services consultancy said.

The impact of quarantining and a downturn in consumer spending has led to fears of a global economic shock, which could be felt in financial markets.

This could be attributed to an expected sharp fall in shares, property and commodity prices and changing currency movements causing emerging market bond yields to rise and “safe haven” currencies, such as the US dollar, Japanese yen and Swiss franc to outperform, said Hymans partner, Calum Cooper.

“While the impact of this will not be felt evenly by every pension scheme it could become a very real challenge for a sizable minority,” he said.

If this was to happen the effects would be felt by pension schemes in the shape of an increase in liabilities of around 14% and a drop in solvency funding levels of around 16%.

The virus could also lead to one-off shocks in longevity, Cooper said, if mortality rate estimates of 2.3% for those infected are accurate.

Assuming that around a third of the UK population get Covid-19, that would lead to an average 1% fall in liabilities in isolation.

For trustees, ensuring that the scheme could continue to pay pensions through a pandemic is crucial, said Cooper.

“Equally important is ensuring your central strategy is thoroughly stress-tested and that contingency plans are in place, workable and understood by relevant stakeholders,” he said. “By taking these strategic steps today, schemes could ensure they are in the best position possible to withstand any side-effects of Covid-19 and any other pensions pandemic.”