By Calum Cooper, Partner at Hymans Robertson
This is similar to the death toll of the 1918 Spanish flu (which had a ‘today’s money’ impact on global GDP of c£3trn or 5%). What might this mean for pensions? What is the impact on covenant, investments and funding (noting for example the likely relative resilience of developed economies) is something to work through. We’ll be sharing more on this in the coming weeks.
Now, whilst we cannot predict the outbreak of disease pandemics (at least definitely not yet, with current funding strains and data sparsity), we can look back to history to help shape possible future scenarios. The Spanish Flu, SARS, MERS all offer insights. In turn, with history and some imagination we can look over the edge of crisis, from behind the comfort of a cup of tea, to formulate plans. As they say (and do) in the Red Arrows, it’s better to make high pressure decisions in a low pressure environment. Back to this shortly…
Zooming out to Integrated Risk Management (IRM)
Of course, pandemics are much more than disease related. When we think about systemic challenges to DB pension schemes (including the PPF), how can you ensure your scheme is relatively resilient?[ii] The first step is to identify the big scenarios that could impact your scheme through an IRM lens. Some of them may be surprising, and all have an upside-down counterpart, for example:
1. Interest rates rise, and inflation falls sharply. How will your collateral make it through the cycle? The familiar alter ego is yields falling but increasingly that risk is covered.
2. Disease pandemic: impact on covenant, funding and investments. The familiar alter ego is, say, a cure for cancer: a sharp rise in longevity (noting we’ve seen the sharpest quarterly improvements for a decade in 2019). Both are relevant as longevity is generally unhedged.
3. Green revolution: a very swift energy and climate policy transition. This could impact investments and covenants very differently.
4. AI disruption: the impact of a swift digital transition, transforming productivity, industries, longevity...
5. And so on…
I sometimes worry that in a world obsessed with data and quantification of risk, we fail to address big important things that cannot be easily quantified. Knightian uncertainty as one of my learned colleagues recently described it. Things that require judgement like what could the impact of the next Coronavirus be and what can we do about it. By definition, this is where the real black swans lie, the events that shape the future. And this is precisely where the value of human judgement lies too!
Working up some Pensions Pandemic scenarios, leading indicators and potential mitigating actions will help to prepare for the big thematic events that will unfold in the 20s. This is one small but mighty step to relative resilience. After all, what could alter the course of paying your members pensions? Events, dear boy, events.[iii]
[i] The WHO broadly defines ‘Pandemic’ as the worldwide spread of a new disease. However, its genesis is from the greek ‘pan’ (all) and dêmos’ (people). I have liberally used the phrase here to refer to adverse events that could affect all (DB) pensions, with a view to ensuring the worst is planned for.
[ii] We could define relative resilience as follows. Imagine you are walking through the woods with your friend and you encounter a bear. You put your running trainers on. Your friend asks you how you expect to outrun the bear. Answer: you don’t need to outrun the bear. That’s relative resilience.
[iii] Please forgive the diversity anachronism and cliché, all in one!
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