Only 'everlasting hangover' from Covid-19 would significantly reduce DB liabilities

Pension scheme trustees and sponsors have been urged to understand the make-up of their members and how they could be impacted by the pandemic when reviewing their mortality assumptions, following scenario analysis from LCP.

The firm's longevity report stated that only an “everlasting hangover” from Covid-19, seeing substantial additional deaths for many years, would lead to a significant reduction in UK defined benefit (DB) pension scheme liabilities.

However, whilst LCP has anticipated that the financial impact on DB schemes of direct deaths from the first two Covid-19 waves is likely to be “marginal”, it also outlined several other scenarios around the pandemic's potential longer-term impact on mortality rates and scheme liabilities.

This included a scenario in which Covid-19 was confined to the two-waves already seen, which is expected to have the mildest impact on schemes, leading to a shortening of life expectancy by one month at 65, and a £4bn reduction in DB liabilities.

The worst scenario, however, would see a hit to pension scheme liabilities of £67bn, or 4 per cent, assuming that the repercussions of the pandemic remain a significant driver of long-term mortality trends, with 60,000 additional deaths in England and Wales every year.

The report also considered a further scenario, which could see the pandemic having a long-term beneficial outcome, thanks to reduced air pollution, an increased focus on holistic health, and strengthened funding for the NHS, which could increase life expectancy by 4 moths at 65, leading to an increase of £21bn on DB liabilities.

The provider highlighted these outcomes as evidence of the challenges of choosing an appropriate mortality assumption at the current time, with much uncertainty over how Covid-19 will play out still persisting.

In light of this, it has urged 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.

LCP also highlighted this as being especially important considering the latest 2020 CMI model gives schemes the flexibility to decide how relevant 2020 mortality numbers are for the individual scheme.

In addition to this, analysis found that the average scheme should expect a fall in liabilities of about 0.2 per cent, if they adopt the new core assumptions of the latest CMI model, translating to a four week drop in life expectancy for men over 65 and one week for women.

Commenting on the findings, LCP partner and report author, Chris Tavener, said: "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.”

Analysis in the report also showed that whilst there is a general perception that pension scheme members have lower mortality rates than the general population, the increase in aggregate deaths over 2020 was broadly in line with the increase seen in the general population.

However, it did note one underreported trend from the pandemic as being the increasing number of deaths in private homes for many leading non-Covid causes such as heart disease and cancer, warning that this could threaten to stall or even reverse improvements in chronic disease mortality if they persist.

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