Deficits at defined benefit (DB) pension schemes in the UK increased by around £100bn in the final week of February as coronavirus hit global financial markets, Hymans Robertson said today.
The financial services firm also warned that solvency deficits could almost double from around £500bn to £900bn if the virus continues to spread.
The deficit spike was attributed to an expected fall in shares, property and commodity prices, as well as currency movements causing emerging market bond yields to rise and ‘safe haven’ currencies to outperform.
Hymans Robertson said that heightened market volatility caused by coronavirus would also increase the degree of variability in pension funding positions.
“If efforts to contain the virus fail, companies may struggle to meet demand which could cause a ‘supply shock’ that will be felt in the global markets,” said Hymans Robertson partner Calum Cooper.
"While the impact of this will not be felt evenly by every pension scheme, it could become a very real challenge for a sizable minority.”
More than 3,100 people have died of the new COVID-19 coronavirus following an outbreak in China at the end of last year, with over 92,200 cases having now been reported in 77 countries.
Hymans Robertson also warned that the virus could lead to one-off shocks in longevity, highlighting how the overall mortality rate of those infected is currently around 2.3%.
If similar mortality rates impacted the UK, and around one-third of the country’s population gets infected, then the firm estimates that pension liabilities could fall by an average of 1%.
In addition, the impact on sponsor cashflows could significantly weaken the strength of sponsor covenants at a time when the regulatory funding regime is about to get stricter.
"Schemes with low levels of hedging and a high allocation to high growth assets may find themselves in an even more challenging situation," Cooper said.
“Taking the time to understand the covenant implications should be the top priority for all DB schemes as this will influence any near-term strategic interventions.
“Ensuring that you could continue to pay pensions through a pandemic is crucial too.
“Equally important is ensuring your central strategy is thoroughly stress-tested and that contingency plans are in place, workable and understood by relevant stakeholders.
“By taking these strategic steps today, schemes could ensure they are in the best position possible to with stand any side-effects of COVID-19."
