swings due to Covid-19 more significant for scheme funding than mortality impact – LCP

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LCP’s latest Longevity Report, published today, has found that the impact of Covid-19 on pension scheme liabilities is dwarfed by movements in markets so far in 2020.

Whilst the number of deaths so far in the UK has been tragically high, the firm estimates that the value of a typical defined benefit scheme’s liabilities might fall by less than 0.25% as a direct result of the deaths of pensioners arising from COVID-19 in 2020.

To put this in context, total UK DB liabilities are in the region of £2,000 bn, so this means that the excess deaths in 2020 due to Covid-19 could reduce liabilities by less than £5 billion. This is a fraction of the total estimated increase in liability values of over £50 billion since the start of the year as a result of falling markets and ultra low interest rates. The ultimate impact of deaths due to Covid-19 on the funding of DB pensions will be driven more by the economic and social consequences of the pandemic following 2020, in particular a severe recession.

The report also found:

  • The initial mortality rate at the start of 2020 was relatively low, with fewer deaths than 2019.
  • The total additional deaths in 2020 to the end of May in England & Wales was around 60,000 compared to if mortality rates been in line with the previous year. This is a rise in the year-to-date rate of mortality of 11%.
  • There are many factors and effects which have yet to be fully understood or analysed. These include the impact of Covid-19 on different groups, the impact of recession and wider factors including health care provision.
  • Longevity insurers and reinsurers are making very little (if any) allowance for Covid-19 in their longevity assumptions at the current time. Any impact on the affordability of longevity hedging has therefore been dwarfed by the impact of changes to the financial markets due to the pandemic.
  • There are longer term issues that will drive mortality trends in the future. Technology and the ability to instantly connect to healthcare could be transformative at boosting life expectancy.

Michelle Wright, Head of Trustee Consulting at LCP, commented:

“The global impact of Covid-19 has been far reaching but it appears that so far it has been market movements that have had a far bigger impact on scheme funding than changes to longevity, although this could all change in the coming months and years.”

Chris Tavener, Partner at LCP, added:

“The direct financial impact of pensioners’ deaths in 2020 due to Covid-19 is relatively modest. It is not certain what the long-term impact will be with questions around whether there will be any second waves, if a vaccine is found and how severe a recession will be. These factors, particularly the impact of a severe recession, could have far bigger consequences than the immediate impact of Covid-19 in 2020.”

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