The current coronavirus and social distancing measures have greatly impacted both capital and labour markets. With illiquid assets and member count reducing, will DB schemes soon face a liquidity crunch? 

 

In a 10-point checklist for scheme investments, consulting firm Aon puts ‘ensuring cashflow’ on top. At a time when swings in yields could mean that schemes have to post collateral, assets are illiquid and companies are suspending dividends, contributions become increasingly important. 

 

Last year, 44% of defined benefit schemes were closed to accrual – meaning 56% were still open to regular contributions from employers and existing – in rare cases also new – members, providing a stream of income. While many of them might already have been planning their future existence without these contributions, the crisis may have just accelerated this expected reduction in income. 

 

The UK economy has all but stopped; with furloughed workers receiving just 3% in employer contributions and redundancies still a strong possibility in the aftermath of the crisis - in the US, a record 6.6m were newly unemployed last week - it seems that schemes will have to consider their cash flow position carefully. 

 

To a great extent that is their current focus anyway, as the Pensions Regulator has made it clear that making benefit payments is the core function that schemes must continue to fulfil. TPR has also permitted schemes to suspend transfers-out for three months, which could give some respite to DB funds that were seeing a lot of activity. 

 

Securing cash flow will be a concern for pension schemes during the pandemic, and it might be necessary to plan scenarios of the lockdown, in some form, continuing for six or even 12 months.