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The coronavirus pandemic was one of the biggest disruptive events that most people will witness in their entire lifetimes. The normal lives of people were completely disrupted by the pandemic. During that time, there was a lot of uncertainty and many people were doubtful whether life would return to normal for a long period of time. Hence, it should not come as a surprise that coronavirus had a massive financial impact on pension funds as well.
In this article, we will have a closer look at how the retirement funds of people were impacted by increasing volatility in the financial markets.
The pandemic started with a 50% reduction in the valuation of most asset classes. Hence, there was a great deal of fear amongst the retirees as they saw the value of their retirement portfolios plunge with very little recourse at hand.
However, since the problem was affecting the entire world, governments started reducing interest rates in order to prop up the financial markets. The end result was that the next couple of years saw a huge increase in the valuation of financial assets. Therefore, what started as a decline in portfolio values ended up being a record increase in the value of the portfolio assets. Only people who ended up withdrawing money at lower valuations suffered losses.
Annuities sellers offer to pay the pensioners a fixed sum of money at the end of every month. Now, since governments all over the world reduced interest rates, this had a direct impact on the pension funds. This is because pension funds had to pay a higher interest rate per month on their annuities based on their contracts. However, they were not able to generate sufficient income because of the falling yields.
Pay cuts were common in most parts of the world. Since people were afraid that they were likely to lose their jobs and their incomes were also following, they did not want to invest their money in any scheme where it would be locked up for a long period of time. The end result was that the contributions being made to pension schemes across the world became drastically lower than the previous years.
Pension funds can therefore invest them over the long term without having to worry about liquidity issues. However, during the pandemic, many people lost their jobs. Hence, they wanted to tap the savings present in their pension funds in order to survive. Governments in many parts of the world allowed early withdrawals of pensions. These early withdrawals lead to some temporary liquidity issues.
The period immediately preceding the coronavirus pandemic witnessed an economic boom. This is the reason that a lot of investors had aggressive open positions in the market. However, as the pandemic began, uncertainty rose through the roof. The result was that there was an immediate flight to safety.
Investors all over the world started changing their portfolio allocations. Money invested in debt instruments was drastically increased. However, this only ended up crystallizing the losses for investors. Investors who had opted out of equity got lower returns in long run due to the bull market which immediately followed the pandemic.
Hence, it can be said that the working of pension funds was deeply impacted by the coronavirus pandemic and the financial events which followed it. Even though there is no way of predicting a pandemic, the covid crisis has taught pension funds that they should have risk mitigation mechanisms in place.
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