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Global: Retirement plans at risk from debt defaults due to COVID-19

Retirement|Investments|Total Rewards
COVID 19 Coronavirus

By Michael Brough and Christopher Mayo | May 29, 2020

Defaults or restructurings of government or corporate debt could cause material reductions in asset values for affected retirement plans.

Employer Action Code: Act

As the impact of the COVID-19 pandemic unfolds, Willis Towers Watson and others have observed an increased risk of default or debt restructuring for many government and corporate bonds. The issue is particularly acute in many emerging markets, including those dependent on tourism. Recently, Lebanon defaulted on its government debt payments for the first time in its history; Argentina is now in technical default; and in recent days the press has speculated about potential defaults in Belize, other parts of the Caribbean and elsewhere. This may present an issue for companies that have local retirement plans invested directly in these domestic bond markets.

Ideally, company retirement plans will be structured with segregated plan assets invested in a highly diversified mix of listed instruments issued in a variety of domiciles; however, as developing-world countries try to build their financial services industries and capital markets, they often impose rules around investing a portion of plan assets in the local market, sometimes even up to 100%. This means these plans’ assets can be highly exposed to local market sovereign and corporate debt, illiquid and even unstable investments. It may not be possible to fully liquidate such investments in times of crisis, and certain investments may run a higher risk of default or devaluation.

Key details

While almost all economies around the world have been stressed by the pandemic, those of many developing countries have been particularly hard hit. Many developing countries, including some of the weaker ones, had very high levels of debt going into the crisis, and their ability to service this debt without relief may be challenged to varying degrees by the suspension and possibly slow recovery of global economic activity.

Employer implications

Employers and their employees may be exposed to emerging market debt through retirement plans located in those markets that hold such investments, and possibly through their plans in other markets as well. Defaults or restructurings of such government (or corporate) debt could cause material reductions in asset values for affected retirement plans.

Companies should:

  • Determine what exposure their plans have to emerging market government and corporate debt.
  • Monitor the change in credit-worthiness of those instruments (e.g., by reviewing changes in credit ratings and credit default swap rates).
  • Understand the available scope to change the asset allocations of their affected plans, within the locally permitted frameworks, to reduce financial exposure if they so choose.
  • Evaluate whether their affected retirement vehicles remain appropriate or whether alternative arrangements are more advisable to provide benefits going forward.
  • Consider a wider review of their debt exposures to ensure they understand the level of risk (credit-worthiness) of the underlying instruments and that they are comfortable with that level of risk (in these distressed times).
  • Review the level of counterparty risk posed by their retirement plan providers to ensure that those providers can continue to an appropriate level of support.

Christopher Mayo

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