'Main immediate impact' of Covid-related longevity changes on schemes is on liabilities - govt

The long-term impact of Covid-19 on mortality rates remains “highly uncertain” according to a government technical bulletin, with the "main immediate impact" for defined benefit (DB) pension schemes expected to be on liabilities.

The update emphasised the importance of understanding members’ expected longevity, and the potential impact on actuarial valuations and member options.

It explained that mortality from Covid-19 seems to increase with age, with typically higher mortality rates for men than women, arguing that this would suggest that the main immediate impact for pension schemes will be on pension liabilities.

The government stated that initial analysis of Covid-19 deaths has indicated that various characteristics, including age, gender, ethnicity, and location, may have “a significant influence” on mortality rates.

The update also clarified however, that the number of years the average person in the UK is projected to live has increased “significantly” over time, emphasising that whilst the rate of improvement has slowed at many ages over the past decade, the “overall picture” is still one of increased life expectancy.

It explained that whilst the impact of Covid-19 on UK mortality rates is “stark”, the long-term impact is yet to be seen, arguing that could either become a new source of “relatively modest fluctuation”, or a “fundamental shift in mortality experience” in future, depending on medical advances and lifestyle choices.

The government stated that the pandemic has highlighted the importance of understanding and communicating uncertainty, urging pension schemes to consider three key areas when setting assumptions for future mortality experience.

This included considering how much weight to give pandemic mortality experience, with the government highlighting the risk that a a short-term spike in mortality could see future life expectancy underestimated, if following the common approach of setting future mortality assumptions with reference to the actual scheme mortality experience.

As such, it urged schemes to consider placing less weight on experience during the pandemic, especially when a prudent approach is required.

It also suggested adopting a case-by-case approach, emphasising that different assumptions may be appropriate for different purposes.

For instance, the update highlighted that mortality assumptions used for an actuarial valuation may not be appropriate for point-in-time decisions around investment opportunities to insure against risk, or for setting member option terms.

Trustees were also encouraged to consider a range of outcomes, with the government emphasising that this approach can help to equip stakeholders with a better understanding of the range of potential outcomes.

As such, it suggested that pension schemes may wish to commission a broader range of sensitivity testing to help illustrate the possible impact of the Covid-19 pandemic on mortality rates.

The update also outlined a number of broader considerations, such as whether people will have adopted healthier lifestyles during lockdown, or whether the pandemic has ‘bought forward’ deaths that would have otherwise been expected over the next year or two.

This follows industry research by the Society of Pension Professionals, which revealed that the majority (57 per cent) of pension professionals do not expect to make any changes to future mortality improvement assumptions in light of the pandemic.

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