The Great Financial Crisis (GFC) of 2008/09 was billed as a ‘once in a lifetime event’. Yet the recent stock market fall has been even steeper and faster than then, coupled with new historic lows in gilt yields plus unprecedented levels of volatility and policy intervention.  In this article I consider the two crises and look at areas where trustees can consider further action.

Whist the apparent effects are similar, the underlying causes of the economic slowdowns are fundamentally different. The GFC resulted from acute financial imbalances within the system, whereas Coronavirus is a totally external agent. The GFC imbalances needed time to be unwound; but, whilst the human costs are tragic and permanent, the economic impact of the current crisis might be temporary. 

Of course, a short-term shutdown cannot be taken for granted. Each day that unemployment rises and confidence falls makes economic depression an increasingly likely self-fulfilling prophesy. However, despite initial signs of a resurgent “nation state” mentality (and the risks that poses to supply chains, production and globalisation in general) the authorities’ response to date has been eye-watering and relatively swift. Despite a stuttering start, proclamations of “whatever it takes” are coming thick and fast.

Perhaps it’s because banks are now stronger and Coronavirus presents no “moral hazard”, but so far it does look as though lessons learnt from the GFC have not been forgotten and the world is better placed now to stop a health crisis turn first to a liquidity crisis and then an economic crisis. The value of “Big Government” and timely fiscal intervention cannot be more clear and is appreciated by those with the power to implement it. 

Most of us, if not all of us, are Keynesians now – even if “helicopter money” looks like a monetary response. Acute fiscal action has been both necessitated by (and helped by) the fact that interest rates are already incredibly low. Whilst low rates make further monetary policy less impactful than before, they do make government borrowing cheap to finance.

Whilst it’s possible that the speed and scale of the response won’t stop the pain of this crisis, it can clearly provide a considerable cushion. Hopefully this will mean that economic activity will be put “on hold” for a while rather than shut down completely – allowing recovery to come sooner and stronger with limited permanent capital loss.

However, no great plan survives engagement with the enemy and beating the virus soon will be key. Hopefully, social distancing, paid leave, more equipment for the wonderful NHS and more testing will see infection rates start to fall. If not, then the human and economic consequences might be catastrophic and this risk remains with us all for a while yet.

In these volatile times, trustees should remember that a pension scheme is a long-term investment and the Pensions Regulator (tPR) has been fast to publish new and updated guidance. Trustees should be discussing issues with their advisers (covenant adviser, actuary, and investment adviser) to ensure they are able to consider issues holistically and in a timely manner.

Whilst pension scheme assets are more diversified than they were in 2008/09 and better protected through LDI against interest rate falls, funding levels will almost certainly have fallen while sponsor covenants will likely have weakened. I would recommend early engagement with the sponsor to address the situation with Integrated Risk Management in mind. Further modelling of investment portfolios can help both parties understand and quantify the investment and wider funding risks.

From an administrative perspective, we have already recommended that clients increase their bank account balance to cover three months of expected cash flow – whilst funds can continue to be traded there may be more difficulty in obtaining trustee signatures if everyone is working remotely, or unavailable due to illness. Of course, disinvesting for cash flow at a point where markets have fallen, or are experiencing significant volatility, is tricky and something your investment consultant should be discussing with you; a review of income payments from existing assets should certainly be considered.

Where pension schemes were planning transitions of assets, we have discussed each case with clients individually and will continue to do so, seeking contingency measures where appropriate. In markets such as these it is even more important to mitigate and avoid (i) out of market risk; (ii) market to market risk; and (iii) intra-day volatility.

Trustees should also review their risk register to ensure that the business continuity plans for the scheme and its advisers are in place and robust. There will be time for detailed retrospective reviews of the processes adhered to during this period at a later date, but in the short-term the trustees should ensure they are comfortable that everything is being done that can be done.

Partner and Head of Investment, Quantum Advisory