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Only an ‘everlasting
hangover’ from Covid-19 will lead to big reductions in typical UK pension scheme liabilities

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Only in the event of a tragic Covid-19 scenario, seeing continued substantial additional deaths for many years would there be a significant reduction in UK DB scheme liabilities, according to a new report from LCP.

While LCP believes that the financial impact on DB schemes of direct deaths from the first two Covid-19 waves is likely to be marginal, it outlines several other scenarios around the pandemic’s longer-term impact on mortality rates and scheme labilities. The range of outcomes illustrates the challenges of choosing an appropriate mortality assumption at the current time, with much uncertainty over how Covid-19 will play out.

  • The scenario that would have the mildest impact on schemes is one which sees Covid-19 as being confined to the ‘two-waves’ we’ve already seen with the vaccine programme making Covid-19 a manageable disease. This leads to a shortening of life expectancy by one month at 65 and a £4 bn reduction in DB liabilities.
  • The worst scenario results in a hit to pension scheme liabilities of £67 bn (or 4%), and assumes that the repercussions of the pandemic remain a significant driver of long-term mortality trends, with 60,000 additional deaths in England & Wales every year, and
  • Another scenario sees the impact of the pandemic as having a long-term beneficial outcome. In this scenario, lock down leads to less air pollution, a society with greater focus on holistic health, increased funding for the NHS and valuable healthcare ramifications from the pandemic. This would see life expectancy increase by 4 months at 65 and lead to an increase of £21 bn on DB liabilities.

LCP is urging trustees and sponsors to understand the make-up of their members and how they could be impacted by the pandemic as part of reviewing the mortality assumptions used to manage their schemes. This is especially important as the latest 2020 CMI model gives schemes the flexibility to decide how relevant 2020 mortality numbers are for the individual scheme.

Other insights from the report include:

  • There is a general perception that pension scheme members have lower mortality rates than the general population. However analysis of a selection of 100 pension schemes that LCP administers shows that the increase in aggregate deaths over 2020 was broadly in line with the increase seen within the general national population.
  • One pandemic trend that has gone underreported is the increasing number of deaths in private homes for many leading non-Covid causes such as heart disease and cancers. This threatens to stall or even reverse the improvements in chronic disease mortality if they persist.
  • If schemes adopt the new core assumptions of the latest CMI model, for an average scheme this will represent a fall in liabilities of about 0.2%, translating to a four week drop in life expectancy for men over 65 and one week for women.

Chris Tavener, report author and LCP Partner, commented:

“The pandemic has introduced more uncertainty and trying to understand the long-term impact of Covid-19 is challenging. What is clear is that in order for there to be a significant reduction in pension scheme liabilities we would have to assume that the pandemic will leave an everlasting hangover, with mortality rates higher than previously assumed for many, many years. With the vaccine programme well underway we hope the long term mortality implications of the pandemic are modest.”

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Longevity report 2021

Our longevity report helps trustees and sponsors of DB schemes understand a key risk: how long members of their pension scheme are going to live.

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