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International Retirement Newsletter - COVID-19 Considerations

The outbreak of COVID-19 is in different stages around the world. Some countries have been feeling the impact of the virus for several weeks, while others are just beginning to navigate a new reality.

The health and wellbeing of employees remains a top priority for governments and employers. Many employers have set up cross-function COVID-19 teams to track the spread of the virus and coordinate responses for their locations around the world. In parallel, companies are taking to steps to try and weather the economic impact of this crisis and evaluating ways to delay or reduce costs.

Continue reading the article below to learn more about this is impacting retirement plans. 

Impact on Retirement Plans

The management of the impact on retirement plans is also coming to the fore (especially by companies with specialist pension managers or large DB/DC retirement plans) as we see employees asking about the impact on their own retirement income and many companies approach a quarterly reporting date.

We have identified eight key retirement-related areas which are outlined further below. There are a number of key items and risks that companies will need to consider around the world; international companies will need to decide what to prioritise, assign tasks to specific individuals, and ensure work is being done locally. 

  1. Managing costs and cashflows: A number of options could arise in some countries to defer pension contributions, or to reduce the cost of ongoing benefits.
  2. Impact of unpaid leave & redundancies: Companies offering unpaid leave and redundancies will need to think through pension implications. In particular, will pension accrual and contributions continue for those taking unpaid leave; how will such programs impact employee pensions at retirement; can retirement benefits be deferred if they have been impacted by market falls? Plan rules may also need to be amended.
  3. Managing retirement assets: Please see this week's Aon investment webinar, and consider options to protect investment portfolios. Click here for a link to the webinar replay.
  4. Managing retirement liabilities: Assess the impact on balance sheet liabilities and funding liabilities, especially for March 31 quarterly reporting.
  5. Regulatory intervention: Review new regulatory guidance in countries around the world where retirement plans exist eg UK, Netherlands, and ensure this is being picked locally by local benefit managers and/or local pension fund boards.
  6. Crisis resilience and virtual meetings: Aon has compiled ten questions to check the resilience of both Defined Benefit (DB) and Defined Contribution (DC) pension schemes and will shortly be releasing similar tools for International Pension Plans. Aon has also provided 10 tips for how pension boards can hold effective virtual meetings in the light of more people working in isolation or from home for longer periods.
  7. DC Plans & Financial Wellbeing: Review the impact the market turmoil and volatility is having on DC members, especially those close or at retirement; and consider providing additional financial education/wellbeing sessions.
  8. De-risking, member option and buy-out/buy-in projects: Assess the impact on any de-risking, member option and buy-out and buy-in projects. Aon's UK risk settlement team has produced a briefing paper which will address the impact of the coronavirus crisis on UK pension scheme de-risking transactions.

Continue reading the article below for more information on the list above.

1. Managing costs and cashflows

Companies may face increased demands for extra pension contributions. The market turmoil may lead to increased funding deficits in some countries. In others, pension plan boards may put in requests for additional capital if they are concerned about the strength of the company. Companies may want to discuss use of other options depending on what is allowed locally, such as renegotiating funding plans, deferring cash commitments or using contingent assets (e.g. in the UK, Germany, Ireland, Belgium, Canada); filing for relief where contributions mandated by law (e.g. in the US); or suspending or reducing pension indexation (e.g. in the Netherlands, Germany).

Companies should also look at pension costs that may be triggered in the event employees are made redundant or offered early retirement.

As an extreme measure, we anticipate some companies may consider closure of some remaining defined benefit schemes to accrual if these are already closed to new hires, if the costs of these are significant, and the company has closed defined benefit plans in other countries. This would not be a trivial exercise, and careful employee consultation and communication would be needed.

2. Impact of unpaid leave and redundancies

Many employers may ask employees to take unpaid leave. Companies should consider the impact on retirement plans, e.g. should pension contributions and benefit accrual continue; can employees still pay voluntary calculations; how will this impact pensionable service and final pensionable pay calculations; will company matching contributions continue, etc. In some cases, plan rules may need to be amended to allow pension membership to continue for those taking unpaid leave.

Employers making redundancies should additionally consider the impact on retirement and savings plans – for example, given extreme market volatility and the knock-on effect on investments, will affected members be able to remain invested in the plan and defer drawing benefit?

3. Managing retirement assets

The large falls in assets, falls in bond yields, and increases in credit spreads have had a massive impact on retirement assets. Aon's Asset Allocation team ran a webinar this week to consider the impact of the market turmoil on investment portfolios, and what can be done at this time to protect portfolios. Click here for a link to the webinar replay.

4. Managing retirement liabilities (including IAS19 and US GAAP)

Retirement liabilities are also impacted. Liabilities calculated by reference to long-dated government bond yields (e.g. funding liabilities in many countries) will have gone up whereas some companies may find that their IAS19 and US GAAP liabilities have gone down (due to increases in corporate bond yields driven by increased credit spreads). Such increases may only be temporary if credit ratings of companies used to set the discount rates change at the end of this month, and this results in a fall in high quality corporate bond yields. Aon is able to help clients assess the impact on retirement liabilities around the world, especially for companies approaching March 31 quarterly reporting dates.

5. Regulatory intervention

Pension regulators in a number of countries, including the UK, Netherlands and Denmark, have recently issued guidance and/or new requirements to pension funds on how to navigate the current financial market turmoil. Pension funds are being asked to review their business continuity plans, and pension funds and employers will need to consider the impact on scheme funding and, in countries such as the Netherlands, conditional indexation and rights cuts. Trustees of UK plans are likely to need specific information to help assess the impact on UK deficits, and whether any additional funding may be needed – in turn, some employers may be wanting to temporarily reduce UK funding commitments if financial pressures elsewhere have increased. We expect both trustees and employers to need advice on this. 

6. Crisis resilience and virtual meetings

Aon has compiled ten questions to check the resilience of your retirement plans addressing areas such as cash management, integrated risk management and contingency plans. These are available for both Defined Benefit (DB) and Defined Contribution (DC) retirement plans.

Aon has also provided 10 tips for how pension boards can hold effective virtual meetings in the light of more people working in isolation or from home for longer periods. These tips followed COVID-19 guidance from the UK Pensions Regulator to UK pension plans but can be applied to pension fund boards in other countries.

7. DC Plans & Financial Wellbeing

Employees close to or at retirement may find their expected retirement income may be significantly lower than would have been the case a month ago. This will depend on the underlying mix of investments in DC portfolios, and how they plan to use their funds to secure an income in retirement. Some employees may find that they can no longer afford to retire, and may want to carry on working and delay their retirement. Younger employees may be concerned on large drops in values in their retirement accounts, and may make rash decisions on investment choices.

Employers will need to consider what to communicate, and how given the increase in home working, to employees in DC plans who are concerned about the market falls, especially those close to retirement.

8. De-risking, member option and buy-out/buy-in projects

The market turmoil could have a significant impact on the pricing of de-risking and liability settlement projects. Employers and trustees may need to review execution strategies, and consider the impact on any transactions involving insurers.

To learn more, visit the Global Retirement Update page to read Aon's monthly and quarterly reports on retirement legislative developments and trends from around the world, and to view Aon's monthly Global Benefits Bulletins.