The recession will dominate pensions in 2009, and as with other areas of the economy, it may have effects in ways as yet unimagined.  A bleak year is in prospect. 

The speed with which new problems are likely to arise and take hold will require trustees and employers to exercise extreme vigilance to identify and address problems as early as possible. 

A critical issue for trustees will be maintaining an accurate assessment of the strength of the employer’s covenant during 2009, so that they can take any necessary decisions from a position of knowledge.

However, there are some risk areas that can be identified now:

The number of businesses likely to fail is set to rise sharply – many in Q1, after the banks take a close look at their clients’ financial position and prospects at the start of the new year. 

• Many of those businesses will have defined benefit schemes – even if they have been closed to new entrants.
  

• Most of those schemes will have significant deficits in the funding of the legacy liabilities, and if their sponsors fall, they will go into the Pension Protection Fund. 

• This will start a downward spiral, requiring increased levies, imposed on a diminishing number of remaining employers. 

The full effects will take more than one year to filter through, but the process has already begun and will escalate through 2009.

Cashflow will be a critical issue for businesses in 2009, with every penny being needed to keep the business operating; many employers will regard the longer-term timescales for funding the defined benefit pension scheme as putting it further down the pecking order for cash than the day-to-day needs of the business.

Trustees will find themselves under pressure to defer collection of contributions, and will have some difficult decisions to take.     

Understandably members of all types of schemes will become increasingly concerned about the security of their pensions as the year progresses.  DC members will continue to see poor investment performance, and their cash funds will be badly affected by tumbling interest rates and rising annuity rates.  DB members will see the high-profile corporate failures with pension schemes cut adrift.

All will therefore be very worried.  This will be a time when good communication will be essential, to calm nerves.

This environment will further discourage many people from contributing to pension arrangements, and threatens to undermine the government’s forthcoming publicity campaign to promote the new personal accounts.

Many defined benefit schemes currently appear to be better funded than they actually are.  Their liabilities are calculated on the basis of corporate bond yields, which have performed quite well compared to equities. 

But these yields are currently artificially high and are vulnerable to a rapid fall, such as when confidence returns to the economy, and employers who have predicted pension costs based on current conditions will substantially underestimate their liabilities.