We are now more than four months into something that has had one of the biggest impacts on our way of life in living memory. There is no clear historical precedent for the nature and scale of Covid-19. Nonetheless, previous pandemics and other crises can offer clues as to what to expect, both in terms of the potential impact on lives as well as on the wider economy.
Two lessons of note:
- There is a trade-off between economic stability and public health and safety. The more short-term economic pain people are willing to endure, the more lives will be saved; and
- Disasters often create permanent change, with the most affected areas of a country or an economy taking potentially years to recover.
So what does this mean for pension schemes?
We are starting to see differentiation between countries in their responses to Covid-19, with the Euro area and Japan fairing relatively well in virus control, the US and Latin America being less successful, with Canada and the UK somewhere in the middle.
Nevertheless, based on the performance of Western stock markets over the past 100 years, market declines of the size recently seen typically take around two years to recover from (my colleague, James Sweetnam, wrote an excellent article in June 2020 looking at how long it takes to recover from a bear market).
Whether you see this as good or bad news depends on your investment horizon. If you have a longer-term perspective, like many pension schemes, then a two or three-year hiatus need not be particularly unsettling.
Ultimately, the aim of the game is to pay members their benefits over the long term, so panicking or making short-term decisions is likely to be counter-productive. Instead, speak with your advisers and focus on ensuring the right long-term investment and funding strategies are in place.