The Covid-19 pandemic reshaped the global economy. Lockdowns disrupted the travel, events, retail and hospitality industries and pensions too also suffered upheaval.
Job losses and the furlough scheme forced many savers to cut back on their contributions, while market volatility created headaches for those approaching retirement.
Read on to discover why Covid took its toll on pensions – and how different schemes have been impacted.
Why has coronavirus affected pensions?
We have seen the stock market impacted over the years following global events such as war, civil unrest, natural disasters and terrorism. The coronavirus pandemic was no different and caused turbulence in the financial markets which have a major effect on pensions. From gold and oil to bonds and commercial property, investors had a tough time keeping track of sudden price swings.
The upheaval in the stock market was particularly severe. The early weeks of March 2020 saw a 20% slide in London’s FTSE 100 share index, according to Statista*. Shares in key industries nosedived or surged depending on the latest updates around vaccines and lockdown measures. Airlines and travel companies were among the many victims of sharp selloffs.
Dividend cuts were another common sight in 2020 as companies rushed to make emergency savings. For example, major banks scrapped dividends worth almost £8bn in March 2020**.
Why does all this matter to pensions? Because the returns on many personal and workplace schemes are linked to the performance of investments. Defined contribution pensions invest savers’ money in assets such as shares. That means sudden market swings can alter the value of a member’s retirement pot.
Pensions are a long-term investment, so younger savers are unlikely to have been too troubled by the ups and downs of the pandemic. But those on the verge of retirement might have been forced to make some tough decisions about when to start accessing their nest egg.
The implications of furloughing
The furlough initiative also altered the pensions landscape by reducing contributions into workplace schemes. Chancellor Rishi Sunak launched the programme in spring 2020 to prevent mass job losses as the economy went into lockdown.
At first, employers could claim 80% of a staff member’s wages from the Government if they couldn’t afford to pay them. This was then tapered down to 60%, with the initiative finishing in September 2021. Around 11.6 million jobs were covered by the furlough scheme, according to official data***.
Under the automatic enrolment system, contributions into workplace pensions continued for furloughed staff. Employer contributions are currently 3% of a worker’s qualifying earnings. The employee pays in 4%, with another 1% coming from tax relief.
Furloughed employees feeling the pinch may have chosen to opt out of their workplace pension, spending their monthly contributions elsewhere. But even those deciding to stick with their pension will have suffered a blow. Their contributions will temporarily be based on their furloughed salary rather than their full wage, making them lower than normal.
How have different pensions been affected?
The Covid crisis impacted some types of pensions more than others, depending on their exposure to financial markets.
Defined benefit schemes
A defined benefit pension provides you with a guaranteed retirement income, based on your salary and time spent with an employer. Unlike defined contribution schemes, your pension income isn’t influenced by how well investments perform.
While these pensions should shield you from market turbulence, it’s important to keep an eye on your employer’s financial situation. Your savings could end up in the Pension Protection Fund if your company can’t meet its pension obligations or goes bust.
Defined contribution schemes
Most employers now offer defined contribution workplace schemes, while personal pensions such as SIPPs can also follow this structure.
With these schemes, the contributions you make are invested in shares, bonds and other assets. Your retirement income is determined by the amount you pay in and the investment performance. That means market volatility is likely to have changed the value of your pension pot since the pandemic began.
For younger savers, it’s important to view your pension as a long-term investment. Don’t panic if the value has fallen – it has plenty of time to recover from the impact of the pandemic.
You might have bigger questions if you’re nearing the end of your career. But it’s still important to keep a cool head. Through a process called ‘lifestyling’, pension providers often move your money into less risky assets as you get older. So the hit from turbulent stock markets may not be as bad as you fear.
How to protect your pension
The pandemic has provided an opportunity to review your pension savings and prepare them for any future turbulence.
Don’t make kneejerk decisions
If you were furloughed or forced to change jobs, it may have been tempting to forget about pensions for the time being. Yet doing so will only harm your finances in later life. Keep contributing to your pension unless you really can’t afford to. Getting into the habit at an early age should leave you with a sizeable retirement pot.
Seek expert advice
It’s worth sounding out a financial adviser before changing any investments in your defined contribution pension. Lower-risk options may prove appealing in the face of market volatility, but it’s always important to look at the bigger picture too.
Learn more about pensions with our retirement advice service.
How does lifestyling work?
Lifestyling is a process where pension providers automatically move people’s savings into less risky assets as they get closer to retirement. It could mean switching from shares to cash, for example.
*Statista: Covid-19 stock market volatility 2020
**The Guardian: UK banks agree to scrap £8bn dividends
***Gov.uk: Coronavirus job retention statistics