The coronavirus is causing mayhem with the world’s stock markets, the FTSE 100 and Dow Jones suffered their biggest losses since the 2008 financial crisis. The impact of the coronavirus on the stock markets is having huge ramifications on pension transfer values.
Most pensions funds invest 60% to 65% of the funds into stocks and shares with the rest in low risk investments like gilts, bonds and property. If the stock market goes down 10%, your pension fund will not fall by the same amount as some of the funds have been invested in low risk investments. However this is very dependant on the investment risk of your pension fund. If your pension scheme is invested entirely in stocks and share, when the stock market crashes the value of your pension fund will crash with it. It also depends on whether your pension scheme is invested in specialist stocks and share.
It has been reported that some specialist funds have lost 20% of their value this year. The most hard hit funds are invested in the oil sector; with some funds falling 42% in value. A recent Mercer’s Pensions Risk Survey reported the deficit in FTSE350 defined benefit pension schemes had increased by £11bn in February 2020.
Pension schemes invested in government gilts and bonds are actually going up in value.
The impact of coronavirus on your pension transfer value is very dependant on the type of pension your are transferring.
Defined Benefit Pension Transfer Values
If you have a defined benefit pension the investment risk is borne by the employer. This is because your employer has already guaranteed the size of your pension payments at retirement. If the pension funds go down in value your employer will have to make up any fund deficit to ensure your receive all your guaranteed pension payments in the future.
When you transfer a defined benefit pension or final salary pension, the pension scheme trustees will provide you with a cash equivalent transfer value (CETV). This is the total amount of cash the pension fund currently needs to pay all your guaranteed pension payments and benefits in the future.
When defined benefit pension scheme investments perform badly, the pension fund will need extra cash in it to cover its members pensions. It can’t rely on cash received from the growth of its investments to cover its members pensions.
So the Coronavirus should not effect your CETV at the moment. It would only be if the trustees can apply a market adjustment that you could find them reducing your CETV. However, there are other risks you need to consider, such as where you invest the funds in the future or whether your employer or former employer is at risk of going into bankruptcy. This could leave your pension fund with a huge hole.
There has been a recent horror story for Flybe employees who found out their defined benefit pensions were not protected by The Pension Protection Fund (PPF) because the pension fund was recently moved to the Isle of Man, which is outside the jurisdiction of The Pension Protection Fund. It would be highly advisable to find out if your pension scheme is covered by the PPF.
Defined Contribution Pension Transfer Values
A defined contribution pension fund goes up and down in value depending on the performance of their investments. The value of your pension at retirement is not guaranteed.
The Coronavirus will have caused your defined contribution pension fund to decrease in value. Because the fund doesn’t guarantee you any defined benefits, the Trustees will only provide you with a transfer value of the current fund value in the pension scheme. If the funds investment has performed badly, then you will receive less.
So the coronavirus is bad news for defined contribution pension transfer values.
Further Reading
FT Adviser: How a global stock market crash affects your pension
The Guardian: What the coronavirus market fall means for your pension
The Telegraph: How to avoid doing ‘irreparable damage’ to your pension in falling markets
Professional Adviser: Coronavirus fears drive DB transfer value rise in February
Grove: Defined Benefit Pension Transfer Advice
Grove: Defined Contribution Pension Advice