By Rachel Marsden, Manager, Audit and Assurance, Grant Thornton

Rachel Marsden
Rachel Marsden

The impact of COVID-19 has permeated every aspect of the UK national conscience since it first reached our shores earlier this year, with every aspect of our daily lives impacted by its insidious and far-reaching grasp. As the first half of 2020 has illustrated, the pensions industry has proven to be in no way ‘immune’. Just as the phrases ‘lockdown’ and ‘social distancing’ entered our lexicon in late March, the continuous positive growth experienced by UK pension funds throughout 2019 was wiped out, with the average fund diminishing in value by 11.6 per cent.

Indeed, the only glimmer of ‘good’ news for pensions in recent months has made for bleak reading: a recently released COVID-19 Impact Analytics report, released by pension administrator XPS, forecasts that the long-term effect of COVID-19 on life expectancy could cause a reduction in liabilities by as much as 5% across the Defined Benefit universe. Pension experts say the virus could wipe as much as one year off current typical life expectancy in the UK – a key metric in the calculation of scheme liabilities – resulting in a potential £90 billion future saving.

From an employer’s perspective, the story makes no better reading; pension contributions are yet another cash outflow demanding funding. Whilst the COVID-19 economic stimulus package did permit employers to reduce contributions to the statutory minimum where more generous packages were previously available, as well as allowing struggling employers a relaxation in the payment timetable for contributions, there remains a legal obligation on all UK employers to uphold their pension obligations to their employees.

The role of the Pension Regulator comes into sharp focus as a watchdog to guard against potentially dubious employer practices in this area. There is a widely-held concern that businesses may attempt to encourage or induce employees presently enrolled in company pension schemes to opt out, thus alleviating the obligation on employers to make contributions on behalf of their employees of at least three per cent of their pensionable pay.  A not-inconsiderable saving at a time where cash is most definitely king. Indeed, the ombudsman has noted a ‘small increase’ in the decision by some employers to take pension deductions from their staff payroll and yet fail to pay the contributions over to the scheme.

With recent suggestion that UK Chancellor, Rishi Sunak, is preparing to announce a break from the Conservative party’s ‘triple lock’ state pension pledge, amid fears that the policy could soon become unaffordable because of the fallout from the coronavirus crisis, it would appear that the pensions industry will be forced to endure the ongoing uncertainty that has engulfed 2020 for a little longer.