Synopsis: This feature will look at how the Covid-19 (Coronavirus) pandemic has affected the pension savings and retirement plans of those employees that are three to six months away from retiring and what is the timescale of this? I.e. what messages need to be sent out and how far away from the employee’s chosen retirement date: what messages should be sent at 12 months, six months, three months
The Coronavirus (Covid-19) pandemic has affected millions of lives worldwide. Research from the Legal & General Retirement survey 2019 found 15% of over 50s still in work – the equivalent of 1.5 million people – will push back their retirement date by an average of three years. Additionally, 10% admit they could end up delaying their retirement plans by five years or more.
With many members under a defined contribution (DC) scheme having the flexibility to withdraw their savings from their account, many could well be forced to do so if they’ve been heavily financially impacted by the pandemic. What messages can employers send out to employees who are planning to retire short term, and how else will the Coronavirus pandemic affect employees that are due to retire this year?
Retirement ans equity
Employees that are due to retire over a short timescale may not experience as many difficulties, due to the fact that they have taken more cautious approaches in the years leading up to their retirement.
Martin Parish, area director at Aon said: “Through market research, there is nothing to suggest just yet that there is anything that will significantly impact employees who have retirement plans close by.
“However those that are planning to retire, and take a natural yield of investments as income, it will be interesting to see what impact the pandemic will have on dividend funds.”
Parish predicts that employees may have to put more into their retirement funds, as the rate of return on yields is less For people retiring who are relying on state pension they may result in receiving shorter than they expected due to the equity lost through businesses drawing down.
Chris Knight, CEO of Legal & General Retail Retirement said: “The financial impact of the Covid-19 pandemic seems to be particularly pronounced for people aged over 50 who are still in work.”
While some people will choose to work for longer, or indefinitely, the key consideration when it comes to this research is that it seems this decision has been driven by the financial impact of the pandemic, rather than personal choice. We know this is a key stage in people’s retirement planning so seeing a material impact on your household income will naturally lead to pessimism about achieving your retirement goals.
He continues: “While it would be naïve to say that these financial issues will not have an impact on people’s ability to retire, it’s important for people to have a strong understanding of the options available to them before concluding that their retirement needs to be delayed or forgotten indefinitely.”
For many of those who are expecting to retire in the next three to twelve months, if they have the right information provided to them, it could ensure a smooth transition to retirement.
Flexible pensions
People may see a down turn in their pensions values and therefore may not want to access these in the current climate. However, many members close to retirement who have been put in a difficult financial situation may feel forced to withdraw funds from their pension savings earlier than planned to sustain their lives.
Because these employees have dipped into their savings, they may be impacted by money purchase annual allowance. And can only then pay a lower amount moving forward.
Matt Mitten, partner at Secondsight believes that it's important for employees to fully understand where their funds are going, and how to best position themselves during this time.
He says: “Time is our friend when it comes to pensions, people need to know what is happening in their pension funds, if an employee is close to retirement they shouldn’t have much equity in their portfolio.”
“Many default funds have mentioned that they’ve dropped by only 6% over a three month period and we’ve seen many businesses recover since the end of March. During the pandemic, employees need to know where their savings are and what age group that strategy is targeted to.”
Despite many employees set to retire in the next three to six months not being hugely affected by the Covid-19 pandemic. Those who still have 12 months left of work need to be ensured not to panic and withdraw funds from their pension savings now, as it locks in any losses that they may suffer.
Karen Bolan, head of engagement at AHC says: “It would be typical for someone so close to retirement to have been moved out of equity investments over the last few years.
Bolan believes that the world of pensions will come back changed. For those plans currently in deficit, she believes there will have to be repayments made over a longer period of time to find a way back to financial safety rather than forcing an employer to make instant changes now.
She continues: “I think it’s inevitable that as we come out of this pandemic, that we will see pension schemes seeking benefit changes. Employers may look at their pensions schemes and see if they can reduce their liability and reduce risks.
There could be changes to member rates, and employee pension contributions to remove the pressure off of employers to deal with the long-lasting financial effects of the pandemic.
Messages that need to be sent out to employees
There are many employees who are suffering from the result of the pandemic. And retirement plans have been impacted because of this. Due to this, a ‘one-size-fits-all’ approach may not be the best solution when communicating pension and retirement changes to employees.
Laura Stewart-Smith, financial education manager at Aviva, said: “However, whether people are three months or three years from when they were hoping to retire, many of their questions will be similar. And it’s worth remembering that anyone over 55 can now access their pension savings, so anyone in this age group should also be considered in any communications planning.
Changes to retirement legislation and working patterns could help. People are now able to stagger their retirement and their access to their pension funds, which could help savers to recoup some of the losses they may have experienced since the onset of the pandemic.
Stewarrt-Smith continues: “Financial education seminars may be worth organising. At Aviva, we’ve switched to providing these online, allowing large numbers of people to join. Employees may also value being introduced to a financial adviser or signposted to government agencies such as the Money and Pension Service or Pension Wise.”
“Overall, communication around pensions, from employers to employees, at this time needs to be handled sensitively, and also considered as part of the wider wellbeing and culture programme.”