Pension schemes could be overestimating pension liabilities by up to 3.5% following Covid-19

Pension schemes could be overestimating pension liabilities by up to 3.5% following Covid-19

22 Mar 2021

• One year on from Covid-19 being declared a pandemic, the full impact on member longevity is significantly clearer
• Schemes can reflect the long-term impacts now and factor them into pension strategy, funding and investment decisions
• A low interest environment means life expectancy assumptions are ever more material

XPS believes that schemes may not have considered the full impact of the pandemic, which could lead to pension liabilities being overstated by between 1.5% and 3.5%. The findings have been made using XPS Covid-19 Impact Analytics, which provides a holistic view of the impact of the pandemic.

The range would imply a potential reduction in UK company accounting pension costs of between £25bn and £60bn. XPS research shows that over 60 companies who reflected the pandemic in their end December accounts made an average adjustment of 2.5%, equivalent to a £40bn fall in UK liabilities if extrapolated to all schemes.

2020 was a significant shock and the long-term impact on mortality will most likely take several years to fully unwind. In order to accurately account for the pandemic, schemes will need to consider: the size of the shock, its duration and what the ‘new normal’ will look like once restrictions lift.

Currently many schemes have viewed 2020 in isolation and have not factored in the long-term consequences. Long Covid is an important consideration, as are delays to healthcare treatments, e.g. for cancer and dementia. XPS believes that these factors, alongside slow economic growth, will lead to a higher death rate.  Whilst other changes may have a positive impact, such as any increase in healthcare spending and potentially better health of those surviving Covid-19, our assessment shows the negative impacts are likely to outweigh the positives.

XPS considers a full range of scenarios, from ‘health rebound’ through to ‘new strains of COVID-19 emerging’, taking into account the key socio-economic characteristics of the members. These include age, location, health and affluence. 

The default parameters in the Institute and Faculty of Actuaries’ Continuous Mortality Investigation (CMI) model – the industry standard tool for longevity – treat 2020 as an outlier with no impact on mortality in the long-term. Whilst the tool allows adjustments to take into account the pandemic,  judgements about how to do so are left to individual schemes. XPS believes that its Covid-19 Impact Analytics allows schemes to understand the range of likely outcomes and then consider how best to calibrate the model.

These findings are particularly significant in a low interest rate environment, as valuations of liabilities are high and more sensitive to changes in underlying demographic assumptions.

Steve Leake, Head of Demographics at XPS, said:

“We cannot just ignore 2020 as the ramifications will last for some time. In my view it is too late to wait to measure the likely impact of the pandemic, which has already had a significant impact on mortality and will continue to do so in the years to come. Without consideration of how the pandemic has affected their members, schemes risk overstating their liabilities by as much as 3.5% and ignoring key information when making decisions on risk management and long-term strategy”