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As part of our series on the economic and legal implications of the Coronavirus pandemic, we take a look at the impact already evident in pension investments and the measures that employers and trustees can take to safeguard their assets as much as possible in a very uncertain economic climate.
Defined benefit pension schemes
In the space of a week, a UK defined benefit pension scheme had losses of circa €110 billion, which took solvency deficits to around €550 billion. As this virus continues to spread it is predicted that it could cause solvency losses to double in size. Ireland is likely to suffer a similar fate to the UK, although this will be reflective of the smaller market that exists here.
Increase of Annuities
The demand for bonds has increased as the virus spreads throughout Ireland, due to falling of stock markets. Yields are now falling, and bond yields support annuities, as yields fall the cost of purchasing an annuity, as a secure retirement income, increases. This is causing added pressures for individuals approaching retirement who are interested in purchasing an annuity.
Temporary lay-offs and contribution obligations
Many employers have decided to close their businesses during this uncertain period and therefore employees may be temporarily laid off. It is important that employers establish what obligations arise regarding the continued payment of pension contributions during this period of temporary lay-off. Employers must consider all applicable legislation and pension scheme rules before reaching a conclusion. Employers must bear in mind that any decision made in relation to this must be effectively communicated directly to each employee affected as well as the administrators of the scheme who are responsible for implementing any such decision.
It is, of course, worth remembering that pension saving is long term. People save for up to 30-50 years and while it is advisable for employers to closely watch current events, the focus should really remain with the long-term objective.
Employers and pension scheme providers should consider the following to mitigate against the financial consequences of the Covid-19:
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About the Author, Marc Fitzgibbon, Senior Partner, The Employment Team.
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