The arrival of coronavirus in Australia in March left Marie Piggo struggling to put food on the table.
The 32-year-old hairdresser from Sydney quickly saw two-thirds of her income disappear as customers stayed at home. Worse still, her husband lost his job.
So when the Australian government announced in March it would allow young people like herself to raid their retirement pots to ease financial pressures caused by the coronavirus lockdown, she jumped at the chance.
"We didn't take too long to decide to take [the maximum] A$10,000 ($10,696) from my superannuation pot," she says. "We used this to buy a car which we really needed, as my husband fell ill, and I needed to get to work."
Piggo says she has no regrets about withdrawing what amounted to one-third of her total retirement savings. "It was not ideal but right now our debts, and getting back into work, are a priority," she says. "I will have to make up the savings later."
While the measure may have helped ease a cash crunch for Piggo, and millions of others around the world, such short-term emergency measures will deepen the retirement savings crisis that is brewing around the world.
Even before Covid-19, the challenges facing the global pensions industry were already immense, with longer life expectancy meaning that individuals need to save much more in order to have a comfortable retirement.
A decade of historically low interest rates since the financial crisis has put even more pressure on pension systems. This is particularly true for corporate and public sector "defined benefit" pension plans — which promise a certain payment to members.
The coronavirus crisis has compounded many of these seemingly intractable problems. For many of those people with individual pension accounts, the challenge of building up savings has become even harder. Australia is not alone in allowing people to spend part of their retirement pots to make ends meet during the crisis — the US is among the other countries that have permitted or made it easier to make withdrawals.
At the same time, the investment outlook has become more complicated for all types of private and workplace pension plans. Central banks have indicated that savers could face another prolonged period of ultra-low interest rates as they try to foster an economic recovery, while a string of blue-chip companies have been forced to cut their dividends as a result of the crisis.
"This exacerbates the trends that have been in play for a while," says Mark Wiseman, a prominent industry executive who once led the Canadian Pension Plan Investment Board. "The value of their assets have been hit and their liabilities have gone up with lower rates. It's a massive double whammy."
Some of the immediate pain has been alleviated by the huge stock market rally since April triggered by the extraordinarily aggressive intervention by central banks — which JPMorgan Asset Management estimates totals about US$17 trillion ($26.4t) globally. But many analysts say that this will serve to fast-forward stock market returns, dimming the future outlook, and many remain sceptical that the strength of the rally can endure. The longer-term picture for pensions has been murky for some time.
In 2017, the World Economic Forum warned the retirement savings gap — or shortfall between what people currently save and what they need for an adequate standard of living when they retire — would balloon from US$70t to US$400t in 2050, in just eight countries. That gap has only got larger as a result of the pandemic.
"Even before Covid-19 hit, people were not saving enough for retirement in most countries," says Han Yik, head of the World Economic Forum's institutional investors group. "So they [early access measures] could be a big hit to the ability of people to save adequately for a pension."
Savings challenge for personal retirement accountsMost pension funds and retirement accounts suffered an immediate and brutal hit this year, when the coronavirus outbreak and harsh lockdowns sent financial markets sliding into one of the biggest and swiftest bear runs in history.
But the impact of the Covid-19 crisis will be most painful for those about to retire, especially those soon-to-be pensioners who have put money away in a private or workplace pension scheme where the employee has an individual account that invests in the stock market.
In the US and UK, average fund values for defined contribution pension plans, which require contributions from employees as well as employers, were down nearly 20 per cent and 15 per cent respectively in the first quarter due to market slump, in theory wiping tens of thousands from the value of retirement accounts. Although, in many cases, much of the losses may have been recovered during the recent rally.
"For those planning for retirement now and looking for a retirement income immediately, they present unenviable challenges," says Richard Eagling, head of pensions at Moneyfacts, a UK-based financial information provider.
Temporary measures taken by governments around the world to soften the economic blow of lockdowns are also threatening to deepen long-term savings challenges for people with retirement accounts.
In Australia's "superannuation" system, where all the funds are managed on a defined contribution basis, trustees were inundated with requests to take advantage of the emergency relaxation of rules, which allowed the early release from pensions plans of up to A$20,000 over two tax years for those aged 55 and over. Between April 20 and June 14, Australian pension funds paid out A$15.9 billion to 2.1 million members under the emergency Covid-19 withdrawal scheme, according to the country's financial regulator.
While this outflow will not present an immediate liquidity threat to Australia's superannuation pension system, which has around A$2.7t in assets, concerns are being voiced about who will pay the most for the emergency measure.
"Superannuation was never intended to be a national relief fund," says Kirstin Hunter, who runs Future Super, one of the leading pension funds. "Allowing people to access their retirement savings early seems like an easy solution to the Covid crisis, but it places pressure on people doing it by forcing them to choose between their present and their future."
Double whammy for defined benefit schemes
The crisis is also exacerbating funding challenges for traditional defined benefit retirement plans, which promise to pay a secure, indexed retirement income to hundreds of millions of beneficiaries around the world in the private and public sectors.
The sponsors of these plans take on the investment risk for payment of the pension, and are required to make contributions to plug funding gaps.
Both private and public plans were already feeling pain from the protracted low interest rate environment since the 2008 crisis. Pension liabilities are sensitive to movements in interest rates, and typically inflate when rates fall.
In the UK, the overall financial health of the country's 5,500 defined benefit schemes, with more than 11m members, was estimated to have deteriorated by 5 per cent in the first quarter, largely due to a fall in the value of financial markets.
In the US, the funded status of the nation's largest corporate defined benefit pension plans fell to 79 per cent in March, its lowest since 2012, according to analysis by Willis Towers Watson, a global professional services consultancy, although the rebound in the market will have reduced some of the underfunding.
Subsequent monetary policy solutions that central bankers applied to ease the brunt of the crisis have helped equity markets and junk bonds to recover in the short term. But they have also had the effect of bringing down bond yields as well, inflating pension liabilities that are calculated using long-term interest rates.
In the Netherlands, Covid-19 has caused a severe shock to a pensions system that was designed to withstand crises. The country's three largest pension funds have lost 10-12 percentage points from a key ratio used to measure the schemes' ability to meet their pension promises.
"Unfortunately, in January 2020, most big Dutch pension funds still had not recovered from the previous crisis [in 2008]," says Anna Grebenchtchikova, a Dutch pensions expert. "While their assets had more than recovered, their liabilities had massively grown due to falling interest rates and increased life expectancy. Many of them underestimated the risks of falling rates, and did not hedge interest rate risk for many years."
Bond investments have historically been the bedrock of most pension funds. But with yields sagging lower for an extended period of time, many fund managers have ventured into riskier corners of financial markets.
"One trend that has been disturbing is that over time many pension funds have adopted riskier and riskier investment strategies to compensate for the secular decline in interest rates," says Seth Magaziner, general treasurer for Rhode Island state in the US. "That made them vulnerable to shocks."
This became apparent when Alberta Investment Management Corporation — the Canadian province's US$118b pension management fund — in late April revealed that it was nursing a US$2.1b loss on bets that markets would remain tranquil, which unravelled in dramatic fashion in March.
"The performance of this investment is wholly unsatisfactory and AIMCo's board and management shares the frustration and disappointment of our clients, their beneficiaries, and all Albertans," said Kevin Uebelein, the fund's chief executive. Wiseman was subsequently hired to chair AIMCo's board of directors.
Yet AIMCo was unlikely to be the only pension manager around the world ruing decisions made in the pacific, buoyant bull market that followed the 2008 crisis.
Whether compelled by low bond yields or forced by too low contributions and overly high return expectations, many defined benefit pension plans have taken on increased risk in recent years.
One popular avenue to try to ratchet up returns has been to rush into so-called private assets, away from mainstream bond and stock markets, areas like infrastructure, private equity, direct lending and real estate.
Pension funds have been encouraged to take risky bets because they often set target rates of return that are too high, argues Tom Sgouros, an expert on funding pensions who has advised state governments in the US.
The accounting rules for funding ratios and target returns are "a bad guide to action — they lead people do to things that are irresponsible and stupid," he says.
Christopher Ailman, chief investment officer of Calstrs, the US$227b Californian teachers' pension plan, says that pension schemes should not rely on generating strong investment returns as a way of compensating for funding shortfalls.
"It's never been an investment return problem. It's been a funding problem," he says. "Those plans need steady consistent funding and they need it again."
Corporate payment holidays
For those companies that still have defined benefit plans, the pressures have only intensified. With the developed world damaged by sharp recessions, many employers are facing severe liquidity problems and have postponed contributions to their company pension plans — a move given the blessing by regulators in several countries, as part of emergency Covid-19 measures.
In the UK, one in 10 employers with a defined benefits scheme, or around 550, have requested a three-month payment holiday on their deficit contributions, with up to £1b ($ 1.9b) over the next 12 months expected to be deferred.
"The pandemic, or rather the financial pressures and lower interest rates . . . caused by the pandemic will lead to further [defined benefits] scheme closures," says Charles Cowling, chief actuary at Mercer, the professional services firm.
While payment holidays are risky for the long-term financial health of schemes, the requests have met little pushback from unions who are also concerned about jobs as well as security for pensioners.
"While this will further hurt the pension funds, it is difficult to imagine a trustee board not making a deal with the employer," adds Grebenchtchikova, speaking on the Dutch situation. "While pensions are important, ensuring the survival of companies (and salaries) is higher on everybody's priority list."
With no clear end in sight to the Covid-19 crisis, the debate is set to ratchet up on how big a priority governments should place on repairing the finances of pension funds as they seek to revive their economies.
Government-run defined benefit plans that find themselves facing a funding shortfall will find a lot of other claims on the public purse. The same pressure on budgets will make it harder for governments to do anything to help individuals repair the savings in their personal accounts after the pandemic passes.
Jeremy Cooper, an Australian lawyer who chaired a 2009 review of the country's superannuation system, says while it is "not ideal" to tap into a long-term retirement savings plan, sometimes a near-term crisis puts the long-term goals on pause. "The trick is to have a plan to get back on track," says Cooper.
In spite of his reservations about pensions being prematurely unlocked around the world, the WEF's Yik says emergency interventions are justifiable to get the economy moving again.
"You have to prioritise the present and make sure people have an adequate income now, with jobs," says Yik. "Then we can work on rebuilding what they can have for later life."
AUSTRALIANS SPEND THEIR RETIREMENT POTS:
• A$15.9b sum paid out by Australian superannuation funds between April 20 and June 14.
• 2.1 million Australians who have drawn down pensions savings under the early release programme.
• A$7486 the average withdrawal of funds under the programme — the maximum payment permitted is A$10,000.
Written by: Josephine Cumbo, Robin Wigglesworth and Billy Nauman
© Financial Times