The COVID-19
pandemic has raised serious concerns for everyone about retirement security,
and even more so for those who are due for retirement. The pandemic has seen
many workers being laid off by their employers, causing a rise in global
unemployment rates (8.3% from 6.7% in 2019). Coile & Levine furthermore
claim that these increased levels of unemployment also threaten economic
well-being of those nearing retirement. Some employers, due to stress on their
financial statements, have resorted to reducing employees’ salaries instead of
laying off employees, which in turn impacts people’s standards of living and
choice of investment vehicles.
Covid-19 has,
to a large extent, affected those employees, who are about to retire vis-à-vis
retirement savings. Retirement benefit schemes of employees, who contribute
voluntarily have been affected the most. Events that affect the source of joy
to investors (return on investments) have had and will have long lasting
effects on future benefits. During the pandemic, we’ve witnessed panic buying
of food and other items. Due to that action, prices of various goods and
services scaled up dramatically. On the other hand, due to lockdowns in various
areas, fewer quantities of products were exported by local markets, thus
increasing domestic supply and circulation of goods, leading to a reduction in
prices. Supply outweighed effective demand in many sectoral markets. A case in
point is the price of matooke in Uganda, which declined from an average of UGX
25,000 to an average of UGX. 5,000 per bunch.
In Uganda,
pension schemes run by voluntary contributors create special Boards of Trustees
that oversee the schemes’ performance, including investment. Trustees, through
their fund managers, diversify into traditional and non-traditional investment
assets and vehicles. However, most retirement contributions are invested in
shares within the financial markets. The value of one’s retirement savings or
contribution is therefore linked to what happens in the financial markets. In
the case of shares, when their values or prices are increasing, one’s savings
will also be growing and the opposite when share prices fall. There is a
notable trend that share prices have fallen in most countries in the world,
including Uganda, due to the impact of COVID-19. South Africa, for instance, reported
a 51 percent economy contraction in the second quarter of 2020 due to the
pandemic. The point is that the pandemic has caused impulsive reactions and
change in consumer behavior, all to the detriment of the retirement, personal financial
planning and savings culture. Fragmentation of global trade as well as demand
and supply linkages have led to price volatility and tumbling of financial
markets.
But all is not
lost. Long term investors have seized this opportunity by cherry-picking
undervalued stocks, with an aim of making better returns in the long run which
in turn impact retirees’ retirement savings. Reports indicate that expected
rates of return to both equities and bonds have declined in recent years. If
this development goes on unbated in the investment space, it will cease being a
risk, but will have a clear implication for investors saving for retirement.
Older workers, who are nearing retirement, will run the risk of diminished
economic well-being due to the shock that reduces their savings, pension, or
social security benefits.
Some schools of
thought advance that older workers retire earlier in response to an economic
downturn. This pattern is evident today due to the premature disinvestment of
assets in the bid to settle the overwhelming numbers of claims for retirement
benefits. This is predominant in voluntary schemes, where the scheme or fund
rules allow members to access their benefit at leaving their employers. The
benefits withdrawn are taken to help these workers to settle their short-term
liabilities due to the abrupt shock of losing their jobs or reduced daily
income, thus inducing the risk of many years of diminished financial wellbeing.
A review of
data on previous, similar pandemics (e.g. the Spanish flu), gives us a
potential snapshot of the economic impact posed by the current pandemic of
COVID-19. Mirroring on the aforesaid, Fernandes asserted eloquently; “. .
. the world today is facing a different
pandemic, evidenced by zero correlation between economic impact and mortality
rates but rather the reaction of governments, companies, consumers and media
all creating a simultaneous demand and supply shock, which is causing various
economies to contract.” The shrinking economies have caused a decline in return
on investment, which further suggests a shrink in retirees’ accounts.
Some economic commentators suggest that individuals should respond to negative stock market shocks by reducing their consumption of normal goods (including leisure) and delaying retirement. However, this hasn’t been the case in Uganda and other countries in the region as many people without social protection programs have resorted to claiming for their retirement benefits across the various platforms to help them cushion short term shocks rippled from the COVID-19 pandemic.
Herman Male | Senior Account Executive - Life & Pensions | Minet Uganda
References:
- Coile and Levine - https://www.aeaweb.org/articles?id=10.1257/aer.101.3.23
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