Coronavirus shocks DB deficit by £100bn in a week

The move, which has seen equity markets slide by more than 10 per cent in the US before beginning to rebound in the US and Europe on Tuesday, has taken the solvency deficits of UK schemes to £500bn, the consultancy said.

The virus has already had a heavy death toll in China, where it originated, and other infection hotspots including northern Italy. If the virus continues to spread, Hymans Robertson estimates that the impact on deficits could be as much as £400bn, bringing the UK aggregate shortfall to £900bn.

As long-term investors, pension funds are typically advised to look past short-term whipsawing in equity markets in particular, focusing on long-term strategic asset allocation.

However, with quarantining and other precautions having a knock-on effect on economies around the globe, there are fears the virus could lead to a recession, with central bank stimulus limited in its efficacy by consumers stuck indoors. In addition to taking a haircut on asset values, sponsor covenants could also be negatively impacted.

Calum Cooper, partner at Hymans Robertson, said: “If efforts to contain the virus fail, companies may struggle to meet demand, which could cause a ‘supply shock’ that will be felt in the global markets.”

Liabilities, which are valued using mark-to-market methods, would increase as projected asset returns fall.

“This could be attributed to an expected sharp fall in shares, property and commodity prices and changing currency movements causing emerging market bond yields to rise and ‘safe haven’ currencies such as the US dollar, Japanese yen and Swiss franc to outperform,” Mr Cooper said.

“While the impact of this will not be felt evenly by every pension scheme, it could become a very real challenge for a sizeable minority.”

The death toll resulting from a pandemic – where 30 per cent of the population contract the virus and around 2.3 per cent of those die – could lessen liabilities by 1 per cent on average, but Mr Cooper cautioned that the impact on sponsors would also be severe, at a time when the DB regulatory net is tightening.

Mr Cooper compared the outbreak with 1918’s Spanish influenza, which caused a 5 per cent contraction in global GDP – the modern-day equivalent would be a $3.5tn (£2.7tn) reduction in global equity market capitalisation.

“A move of this size would likely mean that schemes will have to extend their timeline for reaching their long-term objectives,” Mr Cooper said.

“Whether this is manageable depends on each sponsor’s covenant looking strong enough for long enough to support this, which may in these uncertain times be less likely. Schemes with low levels of hedging and a high allocation to high-growth assets may find themselves in an even more challenging situation.”

He continued: “Taking the time to understand the covenant implications should be the top priority for all DB schemes as this will influence any near-term strategic interventions. Ensuring that you could continue to pay pensions through a pandemic is crucial too.

“Equally important is ensuring your central strategy is thoroughly stress-tested, and that contingency plans are in place, workable and understood by relevant stakeholders. By taking these strategic steps today, schemes could ensure they are in the best position possible to withstand any side-effects of Covid-19 and any other pensions pandemic.”