Corporate balance sheets overstating pension liabilities by £45bn, XPS Pensions Group research finds

Corporate balance sheets overstating pension liabilities by £45bn, XPS Pensions Group research finds

07 Dec 2021

• Impact of covid on life expectancy not being taken into account by companies
• Pandemic’s wider health impacts expected to slow improvements to UK’s life expectancy
• Lack of consideration of pandemic’s full impact leading to £45 billion overestimate of liabilities

UK companies are at risk of overstating pension liabilities by up to £45 billion if they fail to take into account the full health impacts of the coronavirus pandemic.

Research from XPS Pensions Group shows that COVID-19 has not only had a detrimental effect on short-term mortality rates, but that the wider health and economic consequences of the pandemic are also expected to slow the rates of improvement to overall life expectancy.

XPS Pensions Group has worked with over 70 clients over the last year to reflect the impact of the pandemic on their balance sheets. When the full impacts of the pandemic were considered, companies found that their pension liabilities had reduced by between 1.5% and 3.5%*, with the variation explained by the demographics of the schemes. If these rates are representative of overstated liabilities across the UK pensions industry, British companies are overestimating their liabilities by as much as £45 billion.

Accounting standards require company directors to set best estimate assumptions when placing a value on pension obligations. This means that consideration should be given to the impact of the pandemic on mortality assumptions to ensure that these remain a true best estimate.

Simon Reddish, Head of Corporate Accounting at XPS Pensions Group, said

“As COVID-19 becomes endemic, it’s vital that schemes are reflecting the latest research and data about how this it is affecting the population in their liability estimates. As we learn to live with the disease, schemes will have to do the work to make accounting for COVID in their balance sheets a routine.”

Dan Auton, Head of Demographics at XPS Pensions Group, said

“Successive lockdowns have had a notable toll on the population’s mental health and lifestyle, with general health suffering as a result. And the pandemic’s second-order effects – such as increased pressures on the NHS and a reduction in cancer diagnoses and treatments – are likely to continue to have an impact as potentially dangerous variants of the virus continue to emerge. This means that the Government’s promised additional NHS and social care funding is likely only to mitigate the impact the pandemic has had on the health care system, rather than act to boost future life expectancies.  These factors will continue to reduce the rate of improvement in life expectancies compared to expectations pre-pandemic.”

 

Notes 

£45bn estimate is based on the average % impact of COVID analytics across the schemes XPS Pensions Group work with, applied to estimated accounting liabilities of all UK DB pension schemes at 31 October 2021 as tracked by XPS Radar software.