The Impact of Covid-19 on Pension Plans: Risk and Return Analysis

This report provides an analysis of pension plans, focusing on the risk and return trade-off. It examines the impact of market fluctuations, particularly the effects of the coronavirus pandemic on solvency funding and asset values. The report highlights the importance of asset allocation strategies and rebalancing to mitigate risk and stabilize returns. It discusses the relevance of these concepts in business life, emphasizing the need to balance risk and return to achieve financial stability. The report also references the impact of falling stock prices and the potential for underfunding in defined benefit plans. It concludes by emphasizing the need for proactive management and strategic adjustments to navigate market volatility and ensure the long-term financial health of pension plans. The report uses information from the Globe and Mail and Investopedia to provide a comprehensive overview of the topic.

Pension Plans
1. Introduction
The Risk Return Analysis is to maximise the return by creating a balance of risk. The
relationship between risk and return is a positive or direct relation i.e. if there are
expectations of higher levels of risk with particular investment then greater returns are
required as a compensation to that higher risk component. The risk return trade-off is the
balance between the desire for the lowest possible risk and highest possible return from an
investment.
Further, in terms of the article there has been Pension Risk that arises in a defined benefit
plan where the company has to provide specified benefits and the risk of investment is borne
by the Company. The pension risk is on account of falling stock prices in the market due to
which the company has to bear the investment risk of the pension plans and the plans which
were overfunded once, now due to fall in prices the plans have become underfunded i.e. the
liabilities of the plan has exceeded the asset of the plans. The return under the plans are the
return on investment made in diversified assets by the company which in turn are shared in
terms of specified benefit. Therefore, on account of fall down in stock prices the return under
the plans are not upto the mark due to which the company has to bear the investment risk.
2. Why this topic is relevant?
The article basically focuses on the mix of the assets for Pension Plans, the ratio of assets to
the estimated cost of paying future benefits and the rebalancing of the mix of the assets so
that the risk can be mitigated. The Pension Plan condition after the global recession in the
world has led down the ratio of the asset to the estimated cost of paying future benefits. This
ratio has fallen down due to the decrease in the value of the assets. The assets in a pension
plan is a broad mix of assets. The value of the stock prices have been falling drastically which

leads to fall in the value of asset and thereby reducing the ratio of funding in Pension Plans.
The reduction in the ratio is an indication of risk. On the other hand, plans which have bond
holdings and other assets do not assume risk since the ratio has not fallen as the value of asset
has not decreased due to large portion of allocation of assets to other than stocks. Further, the
defined benefit pension plans are at the risk of underfunding because in a defined benefit plan
the company bears the investment risk as it has to wisely invest so that the company has the
funds to pay the promised benefits. But in this falling equity scenario i.e. fall in the prices of
stock the pension risk on account of investment in the equity is increasing due to falling
prices. Further, the underfunding of the plans also indicates risk since the obligation to pay
exceeds the assets under consideration in a pension plan.
Therefore, due to falling stock prices there has been fall in the assets value and due to which
the plans are also being underfunded and specified benefits are not being able to be
transferred. Thus, the overall pension risk increases due to such scenario.
3. How to use this topic in your business life?
Risk and Return in every business life is a very important aspect for making the business
fruitful. In a business, the risk return trade-off should be maintained thereby minimising the
risk and stabilising the returns. Returns under a business depends upon the risk appetite of the
business i.e. depending on how the business responds to the different types of risk undertaken
to earn returns.
Likewise, there has been a pension risk under the plans due to the falling market prices but
the same may be mitigated by changing the asset allocation strategies and rebalancing the
plans. The fall in market on account of Covid-19 shall be recovered in the near future
therefore the plans for the time being should be managed by rebalancing the assets in the
plans. The rebalancing and changing asset allocation shall minimise the risk and the returns

shall be higher which in turn will make the plans situation change from underfunded to
normal as the ratio of asset to the estimated cost of paying future benefits shall be improving.
References
Chen, J. (2020). Investopedia. Retrieved from Investopedia:
https://www.investopedia.com/terms/r/riskreturntradeoff.asp
Wayman, R. (2020). Investopedia. Retrieved from Investopedia:
https://www.investopedia.com/articles/analyst/03/050803.asp