Pension schemes 'overestimating' liabilities by ignoring Covid-19 consequences

Pension schemes could be overestimating pension liabilities by up to 3.5 per cent by not fully considering the pandemic's impact on longevity, according to XPS Pensions Group.

Analysis from the firm, using its own Covid-19 Impact Analytics tool, estimated that schemes were overstating liabilities between 1.5 and 3.5 per cent, which would imply a potential reduction in UK company accounting pension costs of between £25bn and £60bn.

The 60 companies that released financial results for 2020, which were analysed by XPS, made an average adjustment of 2.5 per cent, equivalent to a £40bn fall in UK liabilities if extrapolated to all schemes.

The firm argued that many schemes had failed to factor in the long-term consequences of Covid-19 and were instead viewing the year “in isolation”, which it said meant they had not properly considered that factors such as ‘long Covid’ and delays to medical treatment would lead to a “higher death rate”.

A statement from XPS added: “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.”

The firm said it had taken a range of scenarios into account, but voiced concern that the default parameters in the Institute and Faculty of Actuaries’ Continuous Mortality Investigation model, which it regarded as “the industry standard tool for longevity”, treated 2020 as an outlier with no impact on mortality in the long-term.

XPS head of demographics, Steve Leake, 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 per cent and ignoring key information when making decisions on risk management and long-term strategy.”

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