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Managing retirement amidst adversity: A checklist for Philippine employers

Retirement
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By Romeo G. Carabeo MS, FLMI, FASP | December 16, 2020

Retirement is a celebrated milestone where benefit is considered a windfall. But because of the uncertainty brought about by the COVID-19 crisis, this kind of behavior may change. Retirees may need more sound financial advice.

The COVID-19 pandemic fundamentally changed the ability for people to work normally, companies to operate effectively, and markets to function efficiently. It has demonstrated the material value of human capital, and the health and contributions of people to the company's business performance and to the global economy.

In the early period of the pandemic, governments and companies were in a reactive mode because the speed and scale of the spread of COVID-19 was difficult to predict.

Now that companies have a better understanding of the situation as well as the uncertainties and challenges they face, they are in the position to model scenarios and outcomes to develop plans for navigating the future. Willis Towers Watson has developed a guidebook that outlines an approach to develop such plans that companies can do to adapt to new realities and return to productivity.

In July 2020, Willis Towers Watson conducted a survey in the Asia Pacific region on how employers are responding to the pandemic. About half of the surveyed employers in the Philippines think COVID-19 will have a moderate to large negative impact on their businesses in the next year, and about 25% of employers are uncertain about what to expect in the next two years.

In April, unemployment rate reached almost 18%; imports slowed down by 65% while exports declined by almost 50%. By July, these figures have already improved to 10%, 23%,19%, respectively. So things are improving, but uncertainties remain.

60%
of employers believe the COVID-19 crisis will have a negative impact on employee’s financial wellness.

Less than half (44%) of those surveyed believe that this crisis will have at least a moderate negative impact on employee productivity. The more significant finding is that more than 60% believe of similar negative impact on wellbeing --- physical, emotional, social, and financial.

For the lucky ones, for those who still can work remotely, working from home was embraced and we agree on its advantages. But being alone with limited mobility, sooner or later will take its toll. For the less fortunate, like those with reduced hours, or furloughed, loss of steady income is a great concern. How can employers support them?

As a response, 60% of the surveyed companies have introduced changes in their benefit programs and more are planning changes. Foremost is on healthcare, with requests to include COVID-19 coverage and improved wellbeing programs. Telemedicine has become popular. Financial wellness, we’ve observed, is a relatively new benefit gaining ground.

What are companies doing in terms of retirement benefits?

More than half of the companies surveyed have acted, are planning, or considering promoting independent financial advice to those nearing retirement. Same is true in the provision of financial tools and educational materials to better understand and cope with the current situation.

Under a DC program, this period is a bad time to retire, with asset values down and immediate future uncertain. "How do I protect my assets?" "Do I expect sufficient retirement funds?" "Do I need to work longer?" These are questions you can expect to hear from employees, that will demand answers.

Retirement is a celebrated milestone where benefit is considered a windfall -- time for long-delayed travel plans, start a business, to be a little more generous to a longer list of relatives. But because of the uncertainty, this kind of behavior may change. The question from employees may now be: "Is my benefit enough for the days to come?" Retirees may need more sound financial advice.

Communication on various financial topics is another activity in the survey participants’ to-do list. Fifty five percent are at least considering communicating to employees approaching retirement, relating to the decisions they face in the current environment, while a little less than half (48%) are planning for topics related to decisions they might be considering and the implications during this period.

Surprisingly, at least for me, only 36% are at least considering discussions on how equity market declines are impacting retirement plans. It maybe so that expertise is lacking, and it would be wise to make your fund manager your first resource for this issue.

Your fund manager is a reliable source of investment information and advice. This is a time to review their performance against their mandate. It is good to note that more than half (55%) of the respondents are at least considering the assessment of their fund manager’s abilities for support in this period.

The responses on the other items are quite muted simply because they are not allowed by the plan rules or are not in accordance with the law. For example, under a DC plan, employer contribution cannot be reduced as it is a contractual obligation. Or simply suspended because it will impact the future benefits, especially for those who are already vested.

Even if certain actions are allowed, there are implications that need to be further studied. In a DB plan, contributions can be deferred, but it may be just a matter of time to settle benefits.

Only a few plans allow early withdrawals while reduction of employee contributions can only happen at specific periods. But doing so have consequences as retirement plans are currently geared for a very specific need -– for retirement. But we’ve witnessed employers’ flexibility in providing assistance at the start of the pandemic albeit on a limited basis.

Employees nearing retirement are concerned. They may need to work longer. For older workers, the incidence of work loss maybe permanent and finding a new job maybe a challenge. Sure they can participate in the “gig” economy or become entrepreneurs, but they may lack the financial security they are looking for. Same is true for the younger workers, where most are facing an uncertain future. Many of the employees rely on the employer sponsored programs as their primary source of retirement income and savings. And in difficult times like this, employers are the best source of help and information in coping. So, what can we do for the retirement plans?

I’ve introduced the three stages of our “journey of disruption” because of the pandemic. Let’s go through each one of them for retirement.

At the start of the crisis, certain quick decisions have been made. Hopefully, you’ve gone through most of them:

  1. Review your plan rules and governance policies and address any administrative and compliance aspects of workforce actions. How do reduced hours and salary cuts impact the retirement benefit calculation?
  2. Measure the effect of the crisis, review your considered options on possible actions and its impact on your cash position, not only on the short-term but more importantly on a long-term basis.
  3. In most cases, responses are management actions. It may help to engage the other plan governance stakeholders such as the trustees, retirement committees and other fiduciaries, including your actuaries. Ensure that decisions are aligned with global objectives and governance standards, addressing any gaps.
  4. Review options to create flexibility for employees facing financial hardships. Are loans available under the plan? Will you allow early withdrawals? If these are not allowed under the plan rules, are there any alternatives that can be offered?
  5. This is also the time to emphasize education, information, independent advice and guidance through financial planning.

Most of us are in this stage right now: Restoring stability, having accepted that the situation we are in now will last longer than initially expected.

  1. Assess the cash requirements of any workforce actions; we would want to preserve cash as much as possible, especially for the short term. For example, with Bayanihan 2, employees have the opportunity to enjoy tax-free benefits under the retirement plan (for those who are not yet eligible for tax-free benefits). This opportunity is limited only for those leaving from 5 June to end of the year. Find out how a huge number of applications, for example, will impact the fund and the company’s finances.
  2. Check how the fund is invested, like availability of cash or the liquidity of other assets. Can the fund support huge withdrawals? You don’t like to incur further losses or realize losses because of untimely asset liquidation. Look as well at the implications of any actions in the near term – P&L and balance sheet outcomes; any adjustments in funding or risk management strategies. Is portfolio de-risking an option? What about diversification? You might need specialized advices, but your fund manager can be your initial resource.
  3. This is also the time to evaluate the effect of the crisis on the plan, and identify desired program design changes. Is your DB program sustainable? Does it make sense to convert to DC? For those under DC, do you get the employee engagement you are aspiring for? Does the plan contribute to your retention objectives? Is the plan actively governed? Engage your actuary to assist in a plan design that suits your objective.
  4. Look at how we communicate to our employees – is it a one-message-fits-all strategy or do you employ a targeted approach? How do you increase participation rate especially for voluntary contributions? Design communications to drive employees to a desired behavior towards savings and investments. In the plan design, consider other benefit features like savings for medical needs, and even housing.

Post-crisis is implementation time and these we hope to achieve. With lessons learned:

  1. We’re ready to implement plan strategies that can enable financial security for employees and cost flexibility for the company to navigate future crises.
  2. We have a coordinated funding/financing/risk management strategy to manage pension risks; and the ability to monitor conditions for opportunistic actions. This means having a plan that is sustainable, and properly governed.
  3. Communication is key. Communication campaigns directed by employee behavior analysis by segment and market conditions are relevant factors to a more meaningful and engaging message.
  4. We can incorporate available technology, behavioral science, and workforce segmentation to help employees make prudent financial decisions. Understanding your employees better, their behaviors and needs will lead to an appreciated and successful benefit program.

Impact to Defined Contribution (DC) Plans

At its lowest, the PSE index shrunk by more than 40% (4623.42 on Mar 19, 2020 vs 7742.53 on January 2, 2020) year-to-date. As of November 28, 2020, this figure improved to 11% (or 6927.75), but still indicates a significant loss. Key interest rates are at all-time lows, with the BSP benchmark rate dropping to 2.25%. These developments have a significant impact on retirement funds. Under a DC scheme, where investment risks are borne by the employees, fund values are correspondingly down, a paper loss but a real concern for them. These movements are market reactions or interventions because of the pandemic. However, the average employee may not have sufficient knowledge to understand this investment volatility.

Over the last several months, we received queries on the possibility of early fund withdrawals. Unfortunately, this is not a common plan provision, as the fund is geared towards long-term savings. Even if this will be allowed under the plan rules, employees have to be made aware of the downside in doing so. Look at other options in providing assistance to those in real financial need.

Even during normal times, fund managers are rarely met on a regular basis by some plan sponsors. Assess your fund managers’ performance against agreed benchmarks and SLAs. Challenge them on the results. Ask how the crisis affected their operations and what their forecast is. Seek advice if a change in asset allocation is warranted. They are also in a better position to communicate investment results to your members and a source of encouragement towards savings.

Impact to Defined Benefit (DB) Plans

The drop in interest rates will lead to higher employer costs, adding burden to struggling companies. DB plans are still very common, but DC is gaining popularity because of cost considerations.

To mitigate the impact of the crisis, we suggest employers to consider the following for DB plans:

  1. Execute asset/liability management strategies. A simple example is to match the investment portfolio with the cash flow requirements.
  2. De-risk asset portfolio. Moving towards less risky assets, if feasible, may reduce cash flow and investment volatilities.
  3. For companies continuing to struggle, involuntary terminations might be inevitable. Assess its financial impact. Your actuary will be able to assist you on this. Anticipate the cash flow requirements of these special events as well.
  4. Looking ahead, it might be worthwhile to review the DB plan itself and consider a setup that will lead to better risk management, and the incorporation of other benefits like long-term care, housing, and for other emergencies, where costs are shared.

Importance of Plan Governance

The situation highlights the importance of governance, which is sad to say quite a neglected part in the management of the plan. We see retirement committees that barely meet with their fund managers; or asset portfolios not being reviewed for a long time. Governance can be broadly split into two: Operational and Value-added governance.

Operational governance ensures that the plan works -- timely contributions, turn-around times are met, availability of accurate benefit statements are on time. Another important example is ensuring or at least monitoring the fund managers’ performance. Operational governance is largely driven by risk mitigation.

Value-added governance, on the other hand, aims to help members get the most from the plan. This is particularly important for those under the DC plan. Engage members by having meaningful conversations regarding the plan, to help them understand what they can expect from the plan. For retirement committee members, seek to improve investment efficiency in the fund. This is the part where governance can improve the deal.

Willis Towers Watson has developed several retirement tools or financial modelers to help employees plan for retirement. Answers to questions like how much would employees need to save to maintain their currently lifestyle at retirement, how much can employees expect at retirement if they regularly save an X amount, when can they retire (or how long do they need to work) based on their saving habits can be provided given certain assumptions. These tools are personalized and outputs are quite engaging and compelling.

Other tools are in various stages of development, such as on managing debt and saving for children’s education. These are just examples of what can help employees in planning their financial future and be engaged with the plan.

Once this crisis is over, and I hope it will be very soon, it may be a good time to assess what we have learned during the crisis, and use this to better prepare for another one.

Romeo is the Retirement leader of Willis Towers Watson Philippines.

Author

Head, Retirement - Philippines

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