How has the Covid-19 pandemic impacted workplace pension schemes?

Despite the pandemic’s massive impact on the economy, employers have so far made few changes to their pension schemes, and seen little demand from members for reducing their contribution levels or switching investment choices. A minority of employers are providing employees with the opportunity to reduce their contributions and divert the money, but there is little take up, with most drops in contributions due to the government’s Job Retention Scheme.

Rona Train, senior consultant at Hymans Robertson, says: “There is limited evidence of members opting out of pension schemes or reducing their contributions, although this is a small number and shows the power of defaulting. It is more likely that members’ immediate priorities, including finances and employment, have driven any action around their pension. We are aware that members have reduced contributions in these situations.”

This is a relief for the pensions industry, as the amounts being saved were already too low, says Mark Williams, pensions board chair at the Institute and Faculty of Actuaries. “While this approach makes complete sense in the short-term, it exacerbates the longer-term adequacy problem, further reducing retirement income and potentially increasing feasible retirement ages,” he says.

Neither have members looked to change their fund choices in recent months. Lorna Blyth, head of investment solutions at Royal London, says: “Most employees will be invested in the workplace default and typically we don’t see many requests to switch.”

However, this may also be fortuitous as the evidence suggests people who do switch will typically switch out of a fund at the bottom of the market and buy in at the top, the opposite of what they should do, explains Blyth.

Investment strategy consideration

Sponsors of both defined contribution (DC) and defined benefit (DB) schemes have been using the pandemic as an opportunity to assess whether their investment strategies remained robust during market volatility. “Well-managed investment strategies have held up reasonably well since March,” says Williams. “While there have been falls in asset values, this has not occurred to the extent that may have been expected.”

For trustees and governance committees, the focus has been on assessing whether default investment strategies performed as expected, explains Train. “For many, this has also brought into sharp focus the importance of concentrating on the long-term impact on member outcomes of market moves, rather than concentrating on the short-term impact on the value of members’ pension pots,” she adds.

Hyman Robertson’s own staff pension plan moved from a contract-based to a master trust arrangement to allow greater flexibility in developing a new default investment strategy, which was launched in September with lower fees. “During the early days of the pandemic, we ran a series of webinars for our members that looked at the impact on them, depending how far they were from their selected retirement date,” says Train. “We reminded people about the default strategy and how it was invested, considered the impact of market moves on each of the three phases: growth, consolidation and pre-retirement, and gave people tips about what they could do depending on how far they were from retirement. At the same time, we took the opportunity to trail our new investment arrangement and default strategy.”

Pensions communication
Employers have taken different approaches to communication during the crisis, with some actively pushing targeted and segmented messages out to members and others preferring to simply put a note on the member website seeking to reassure those interested enough to log in. However, lockdown increased the impetus for employers to offer more information online and communicate more innovatively, for example using video benefit statements.

Kevin Martin, group director of customer services at B&CE, says: “At the beginning of the outbreak, we increased our email and online support and prioritised over 55s who wanted to access their savings for phone support. We created bespoke content and built support and guidance on Coronavirus, improving our contact pages and signposting so customers could quickly access information.

“We shared videos showing members how to manage their pensions online, made more of our forms and transactions digital, and provided information about the Job Retention Scheme and how employer contributions were initially covered by the scheme.”

Although few employees switched investment funds, the crisis concentrated minds regarding financial resilience. Nathan Long, senior analyst at Hargreaves Lansdown, explains: “Our pension clients are primarily professional services [organisations], and we are seeing a huge amount of savings flowing in at the moment because such firms have not suffered greatly with layoffs and salary reductions.

“It’s partly that members have fewer places to spend their cash, but they may be nervous about the future, and there has been significant paying down of debt. Debt management has always been the hardest element of financial wellness to deliver but post lockdown this module has much less stigma.”

Pensions engagement
PensionBee reports that consumers have adopted a more cautious approach to their finances, with the average withdrawal falling from £13,198 in quarter two to £12,890 in quarter three. Romi Savova, chief executive officer (CEO) of PensionsBee, says: “We found that lockdown had a significant impact on savers’ withdrawal rates, with the proportion of customers making withdrawals decreasing by 33% from April 2019, with only 8% of customers aged 55 and over choosing to withdraw money from their pension in April.”

The online pension provider also found its customers stepped up their engagement during lockdown, with almost 49,000 individuals contacting the provider via live chat or email between March and August, up 218% from the same period in 2019. “There was a 37% increase in the number of customers who completed their first pension transfer between March and July in 2020, compared to 2019, signalling that consumers used their time in lockdown to manage their finances and plan ahead for their future,” says Savova.

Longer term, however, the pandemic’s lasting impact on the labour market will damage people’s retirement ambitions. The unemployment rate is forecast to rise from around 4% to 9% according to the Bank of England in its Monetary Policy Report, published in May 2020, and combined with regular job switching and career changes, many pension pots will be inadvertently abandoned.

Covid-19 could also increase the number of dormant pensions left behind by savers from an estimated 16.3 million in 2019 to over 21.5 million in 2020, according to research by PensionBee, published in May 2020. It also found that basic auto-enrolment pensions are the fastest-growing dormant category, with an expected increase of 48%, from 10.2 million dormant pots in 2019 to 15.1 million in 2020.