Defined contribution pension schemes require for individuals to sponsor their pension accounts on their own, while the employers sponsor the defined-benefit pension schemes as employers guarantee a pre-defined investment into their employees’ pension accounts every year. The defined benefit schemes had already seen a decline in recent years, with the defined contribution pension schemes being more promising. The defined benefit plans were considered to pay better during economic downturns. However, in the current financial circumstances, the defined benefit pension schemes have been struggling. As a result, the number of defined contribution pension such as private pension which offers tax-free returns on investment in the United Kingdom will rise by 48%, a 4.9 million increase from 2019.
The employers make the contributions towards the defined benefit pension schemes, making it trustworthy as the benefits were promised and guaranteed, and the employers are legally obliged to make the contributions. However, with the dramatic change in the commercial world owing to the COVID-19 pandemic, many businesses have been felt its impact. Companies have reported a loss of revenues of as high as 97%! In such circumstances, when companies are struggling to pay salaries, rents, and keep the company afloat, the contributions to defined benefit pension schemes are bound to get negatively affected.
As a result, about 10 percent to 15 percent of the United Kingdom defined benefit fund trustees have received requests for deferral of defined benefit contributions, and 12% of the sponsoring employers have requested suspensions of deficit reduction contributions. Due to the stock market crash and low-interest rate, the sponsoring employers may go for freezing or offloading of defined benefit pension schemes. The company might also suspend any future service contributions, suspend or reduce any contributions towards deficit repair or may cease payments to shareholders. The suspensions and receptions may be temporary or permanent, depending on the speed of recovery, if it happens.
The Defined Benefit pension schemes have already been in a deficit. As of April 30, 2020, the total shortfall in the United Kingdom pension funds covered by the 7800 Index of the Pension Protection Fund was £128.5 billion. Of the 5,422 pension funds on the index, about 65% are running in deficit. The COVID-19 pandemic has only led to the worsening of the already unfortunate situation. The deficit has further shot up by 72% since January 2020. 600 of the 6,000 defined benefit fund trustees in the United Kingdom have received requests for deferral of contributions, and 12% of the sponsoring employers have requested suspensions of their contributions to deficit reduction. In the last three months, the National Employment Savings Trust (NEST), the major workplace pension scheme in the United Kingdom, saw its growth portfolio fall by around 8%.
Nissan and General Motors is one company feeling the heat, and it is taking drastic steps during the virus pandemic. Nissan Motor Manufacturing United Kingdom is in talks with its employees and trade unions to put an end to its defined benefit fund for almost 1,800 employees in the United Kingdom. Nissan made this decision to keep the business sustainable over a long period during the economic downturn caused by the coronavirus pandemic. It is essential to consider that trustees of the defined benefit pension schemes can allow the companies to defer the contributions to the funds for three months till June 30, 2020. The trustees can also suspend all the transfer activities during periods of economic turmoil because of the outrageous demand for transfers, the volatility of the market, and ultra-low interest rates.
The top examples of sponsoring employers failing to contribute towards their defined benefit schemes include Debenhams and TopShop. Debenhams, the leading department store chain in the UK was unsuccessful in making its deficit recovery contribution for April 2020. The company had requested The Pensions Regulator for a monthly payment into its defined benefit scheme, which it could not comply with due to lockdown and store closures. Similarly, TopShop also halted payments to its defined benefit pension scheme to conserve cash during the economic crisis.
The economic havoc caused by the coronavirus pandemic is not expected to pass by soon. The negative impact is bound to stay for long, even after the economy recovers from the jolt. Therefore, defined benefit pension schemes may undergo long-term and permanent changes to remain viable. The members of the defined benefit scheme whose employers become insolvent will be protected by the Pension Protection Fund. Under the fund’s lifeboat scheme, the members already withdrawing pensions will continue to do so but will lower annual increases. However, the members who are yet to reach their pension age for the scheme will receive 90% of their expected pension amount, and annual payments will be capped at £41,461 at the age of 65.
Thus, the COVID-19 pandemic will have short-term and long-term impacts on pension preferences of the employees and payment capabilities of the employers. Amidst the dramatic rise in unemployment and financial instability, defined contribution pension schemes, that are hit less hard than the defined benefit schemes, can become the go-to option for most of the individuals.