How COVID-19 has changed retirement planning and could herald an end to defined benefit pension schemes

Everyone knows that the global pandemic will change the economy, but few may have considered what those changes will mean for people’s retirement planning.

In a new blog, WealthTech100 company Kidbrooke explains how the coronavirus could impact how people plan for their retirements. “COVID has disrupted our retirement planning, in much the same way as it’s disrupted the rest of our lives,” Kidbrooke writes.

The Swedish company kicks off by differentiating between three stages of people planning for their golden years: accumulation, at-retirement and decumulation. Another way of putting it would be to say that accumulation is at the beginning of the savings-for-retirement journey, at-retirement is when shutting down from work for the last time is drawing increasingly closer and decumulation is after one has retired.

During the accumulation years, Kidbrooke suggests that people are more prone to invest and save at a higher risk because the point at which they are looking at cashing out on their savings is still far off in the future. However, as the global contagion spreads, Kidbrooke notes that this has no doubt caused concerns for people.

The WealthTech company advises against acting too impulsively. “With a decade or more until crystallisation, we should certainly remain calm amongst the turmoil, avoiding knee-jerk decisions where possible,” Kidbrooke writes. “In the 20 [or] 30 years most of us will accumulate pension assets, we will have to endure many financial crises and economic downturns. The salient action for us now is to question locked in asset allocation approaches, which won’t flex to accommodate C-19 paradigm change. Some industries, previously considered low beta safe havens, will likely be paralysed for many years to come. Others, previously considered to be high beta outliers, will thrive. Your investment toolkit should calibrate seamlessly into this developing reality.”

For those getting close to retirement, they are more prone to switch to less risky investments, such as shares and commodities, to safer ones, such as cash and bonds. The problem for this group is that more market volatility caused by the coronavirus means that the ones looking to cash in on their previous risky investments might not be able to do that at the same high price as before. That presents this group with a conundrum of selling out now or risk trying to wait out the storm, for a recovery that may not manifest for years to come?

In the final stage, retirement, people expect to enjoy the winnings of their lifetimes. Yet, there has been more negative rates at the short and medium ends of the curve as yield curves crumble across the planet. Nevertheless, Kidbrooke suggests that this does not rule out annuitisation. The company writes that  “these rates differ from person to person and the emergence of coronavirus impacts longevity assumptions for those with certain pre-existing co-morbidities.”

It suggests that people in this stage of life can pick between a wide range of options, including deferring tax free allowances and drawing up cash flow models. “Remaining invested could well be key, so drawdown or delaying crystallisation entirely are worthy of consideration,” Kidbrooke says. “This is a complex and highly personal calculus and the value of high-quality advice and guidance will quite literally pay dividends for us as we look to live our best lives in retirement.”

Kidbrooke also notes that defined benefit (DB) pension schemes holders may be insulated from many of these concerns for the time being, portfolio managers may still struggle with them, particularly in regards to “the paucity of fixed income options will be a material concern.”

It also suggests that the virus could “herald a permanent end to the inherently questionable and often scandalous practise of DB transfers”, adding that too “much pain and suffering has been caused by bad actors in this space in recent years – good riddance and begone!”

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