UK Firms Stop Pension Top Ups as Coronavirus Fears Continue

As the covid-19 crisis worsens, its economic impact has been showing worrying signs for the global economy. As of 25^th April 2020, the total number of cases in the United Kingdom were reported to be at 138,082, and the total number of deaths in the entire country were reported at 18,738. The daily number of labs confirmed cases in the UK stood at 4,583 on 25^th April, had been reported by the WHO. Even though the numbers are now towards a decline, it doesn’t seem like the government will ease down any restrictions that have been imposed in the country. These lockdown restrictions are also expected to continue to have a significant impact on the economy as well. And even though the government has announced a number of stimulus packages and bailout funds for business, it is clear that everything will probably fall short.

Now, as per some media reports, the administration might have to deal with another crisis, that will have, direct impact on the pockets of its citizens, especially the older ones. It’s been reported that a number of companies operating in the United Kingdom might abandon the pension top-ups for their employees if this period extends any longer. It has already been reported how a number of companies are now demanding their landlords to give them a moratorium period of three months or defer their rent and lease payments by three months because of the liquidity crunch that they face currently. A study, done by pension experts in the country, now suggests that if the hundreds of companies that continue on their decision to abandon the Pension payments, the contributions might be slashed by approximately £500 million. Debenhams, which was recently also put under administration as is facing rent issues as well as store closures, reportedly also missed its recent pension top-ups, while the Arcadia group has announced that it will stop all the pension payments for the time being.

The most notable thing out of these reports is the fact that the regulators in the United Kingdom, are allowing companies to suspend or stop these payments, at least on the temporary basis. This is reportedly being done so that the businesses can retain enough cash so that once operations begin in the country, they can get back on track, and make these payments retrospectively.

What does this mean for UK’s citizens?

It has already been discussed that the employer’s pension schemes make up for one of the biggest parts of an individual’s retirement corpus, and since the return on this is done through the compounding of the deposits, even a single miss in the payment cycle could have a significant effect on the individual’s final retirement sum. The people who could be the most affected by this are the older ones, who are closer to their retirements, as their part of the payments during such an age are generally higher, and hence the compounding is even more.

Some pension consulting firms have stated that around 500 companies in the United Kingdom could partake in this programme of cutting on Pension Top ups, and they have argued that this is extremely important so that businesses in the country continue to survive. The consultants have also argued that if the cost is limited to £500 million worth of pension payments during this period, it could be much lesser than some of the other costs that will have to be paid by these companies if they continue to top up pensions at least for the next three months. The critics, though, have said that this is not fair, as in, this time of crisis, it is extremely important, especially for the large businesses to continue to support their employees, as it could become a matter of survival. The pension regulatory body in the United Kingdom has stated that to protect such citizens, whose employers fail to make pension contributions, will be supported through the UK’s State Pension Protection Fund.

How is Covid-19 affecting pensions in the UK?

In the year 2015, the government of the United Kingdom, through the Pension Regulator in the country had announced and implemented a “Pension Freedoms” programme. This programme was meant to give freedom to people above the age of 55, to manage their pension funds by themselves, in whatever way they wanted. They could access any part of their pension funds, as and when they wanted with no requirements on making other annuity investments or other such products from the withdrawal, they make from their pension corpus.

Since the launch of this new programme, the UK has been struggling, first, with the Brexit referendum, followed by a deal not being agreed for the next three years, by a new prime minister, a snap election, Brexit finally being done, but the details still remaining uncertain and now, the coronavirus. Throughout this period, there have been massive economic challenges for the people of the UK. To counter this disruption to their regular incomes, especially during this Covid-19 phase people above the age of 55 have been consistently withdrawing from the Pension funds, to protect themselves in the current scenario, leaving the security of retirement to be weak. As per reports, around 500,000 people had taken withdrawals as a part of this scheme as of 1^st November 2019, and approximately £30 billion pounds had been withdrawn. Some reports as recently as April 17, 2020 suggest that approximately £80 billion have been withdrawn from “Pension Freedoms”.

Such a high figure of withdrawals has been due to the fact that some of the people have withdrawn around 30 to 40 times the expected value of their final pension at the time of their retirement. They have been able to do this because Bond markets generally drive the value of the final pension amounts, and bond markets have been extremely volatile in the recent past, with a multiple policies, fiscal as well as administrative changes.

Due to this heightened activity of withdrawals from the government’s pension scheme, the Pension Industry recently requested the government and the pension regulators of the United Kingdom to regulate the transfer of pensions. It has been reported that a number of employers give their employees large bonuses in terms of pension contributions, that go towards their pension account, inflating the final value of their expected corpus. This allows these employees to use the Pension Freedoms scheme and withdraw or transfer large amounts from their corpus. Another factor has been the tax benefits of these pension contributions, which allows money to be passed on to the beneficiaries of an account holder, free of tax, in case the person dies before their 75^th birthday.

The government’s response to this has been a little slow because of them dealing with the Covid-19 crisis, but they say that they are working to fix the system so that no one can exploit it, and the right amount of money reaches to the right hands as well. It is expected that in future, we will see legislation to regulate this issue so that no one is able to exploit the system of Pension in the United Kingdom.