Fri | Dec 3, 2021

Pandemic erodes $37b in pension savings

FSC warns more plans could fold amid fallout

Published:Wednesday | June 9, 2021 | 12:08 AMHuntley Medley/Associate Business Editor

Investments, insurance and private pension funds regulator, the Financial Services Commission, FSC, is warning that more pension funds may fold from the adverse impact of the ongoing COVID-19 pandemic. In its recently released review of the...

Investments, insurance and private pension funds regulator, the Financial Services Commission, FSC, is warning that more pension funds may fold from the adverse impact of the ongoing COVID-19 pandemic.

In its recently released review of the industry for 2020, the FSC issued a strong caution to fund managers to ensure prudent management of their portfolios in an effort to keep plans afloat in the industry that saw a nearly 5.4 per cent asset decline over the pandemic year.

Assets valued at over $700 billion at December 2019 fell to $663 billion at December 2020 – a $37-billion shrinkage of pension fund portfolios.

“The FSC continues to implore pension plan trustees and agents to employ solid governance and practices and effective risk management, as well as exercise due diligence in managing plan assets, bearing in mind the risks faced by plan sponsors and participants in this uncertain period,” the commission said in its latest published report on the sector.

Pointing to declining disposable income levels, the FSC suggested that the challenge of increasing pension coverage may be amplified in the quarters to come. This, it said, could include wind-ups, adding to the 11 plans that folded last year.

The industry’s asset value of $700 billion included assets in plans that were wound up or in the winding-up stages. Active plans held assets of $653.23 billion at December.

“The majority of pension plans which initiated winding-up proceedings during 2020 cited financial difficulties or cessation of contributions by the sponsor as the rationale for winding up. Given the ongoing challenges posed by the pandemic, there exists the potential for additional wind-ups as well as increased tardiness or cessation in the payment of contributions,” the FSC document, published on its website, stated.

It noted, too, that as a result of this outlook, members of defined contribution plans that do not have guaranteed returns, but rather are dependent on factors such as the amount paid in and the fund’s investment performance, may not achieve maximum returns during the pandemic period. The outcome, it said, could be smaller pension benefits and lower-income replacement ratios. For sponsors of defined benefits or guaranteed pension plans, the commission suggests that in the prevailing investment climate, they may not be able to fund impending liabilities if financial difficulties persist.

The FSC noted, however, that at year end, some 347 or 96 per cent of the 360 pension plans for which it received solvency data were solvent. It provided no additional information on why others did not submit solvency data. There were 377 plans in place at December, two fewer than in December of the previous year, as nine new plans moderated the effect of the 11 that exited the market.

Meanwhile, the 5.38 per cent decline in the value of pensions funds over the calendar year was a deviation from what the commission described as a track record of consistent growth in the private pensions industry, which grew 2.87 per cent per quarter and 11.15 per cent per annum for the past five years with an even bigger 16 per cent asset improvement during 2019.

Even the 2020 contraction, it highlighted, was punctuated by marginal growth in two quarters with the April to June and October to December quarters having shown asset value improvements of 2.43 per cent and 3.72 per cent, respectively.

Despite asset value decline last year and an estimated more than 7.5 per cent contraction in employment over the period, private pension funds were said to have seen 15.63 per cent more persons getting coverage. The FSC reports that as at December, there were 133,158 members of private pension funds, compared to 124,631 in December 2019 and 133,165 at September 2020. Pension coverage has been growing each year since 2016, the FSC data showed.

In terms of where private pension money was invested, the 2020 report notes that there has been a gradual shift from investments in government securities to equities and pooled arrangements. Pooled arrangements, valued at $250 billion, remained the largest asset class, accounting for nearly 38 per cent of invested funds.

Government securities accounted for 22.22 per cent or $147 billion, overtaking investment in stocks, at $144 billion or 21.74 per cent, to become the second-largest asset class within the private pension portfolio.

The FSC said this change was partially attributable to declines in the value of equities due to uncertainties presented by the global pandemic and that given the volatility of this asset class, it is expected that funds will continue to embrace alternative investment opportunities to preserve plan assets. Increases in direct holdings of deposits, repurchase agreements, promissory notes, real estate, and mortgages were also noted during the period.

“Some pension plans have also begun to pursue investments now permitted by the amended investment regulations, such as private equity, notwithstanding there is a general reduction in funds invested in other assets. Trustees and agents have been exploring available investment opportunities as well as diversifying assets to reduce concentration risk,” the FSC said.

Another trend highlighted by the FSC pensions report was that while the number of retirement schemes remained at 13 during 2020, there was a 4.6 per cent uptick in assets under management to $52.36 billion, and an 11 per cent growth in membership in such schemes, leading the financial services regulator to conclude that there is heightened interest in planning for retirement.

Superannuation funds also grew membership last year, but by less than three per cent. Even sectors like tourism – which was hit hard by the pandemic and is estimated to have contracted by around 66 per cent over the full year of the pandemic to March 2021 – saw 1,400 individuals join up, a 25 per cent increase over 2019.