The global consequences of Covid-19 have been far-reaching, with significant implications for public health in the UK. Although the high number of deaths, and the emerging second wave, is rightly occupying the headlines at the moment, our analysis implies the financial impact on your defined benefit pension scheme of deaths due to Covid-19 may be much lower than you might expect.
Potential impact of Covid-19
Covid-19 will affect future life expectancies, both as a result of direct and indirect excess deaths. However, it will be some time before we know the full effect.
The ultimate impact on the financial position of your scheme won’t be dominated by the experience in 2020. Excess deaths in 2020 will only change the liabilities by a small fraction of a percent for a typical scheme.
Instead, the impact will be driven more by the far-reaching after-effects following 2020. Factors such as any emergence of repeat waves of the virus, the roll-out of a successful vaccination programme, the repercussions on our environment and health care system (including deferred diagnoses/treatment), and on people's health from a deterioration in the financial strength of the economy could have far bigger consequences.
However, even if we make allowance for these indirect effects of the virus, the financial impact on your scheme is likely to be much lower than you might expect.
Based on our current modelling of plausible scenarios over the short to medium-term, the impact is unlikely to change the value of liabilities for a typical scheme by more than 1%.
Counting deaths
Mortality assumptions should be specific to the circumstances and characteristics of a scheme, and we’re seeing that Covid-19 has affected subgroups of the population differently, so will likely affect schemes differently. Our recent Longevity Report ‘Charting mortality trends: signposts for an uncertain journey’ highlights many of the differences being seen.
When thinking of a review of assumptions, a natural starting point will be a wish to consider the number of members who have died due to Covid-19 in your scheme.
Unfortunately, it is generally not possible to identify and hence count these members. Firstly, although there may be anecdotal evidence, administrators rarely record or hold the cause of death. Secondly, there has been lots of commentary on how hard it is to count Covid-19 deaths in the general population.
As an alternative, you might look at the emerging overall mortality experience of your scheme over 2020 to see if there has been an increase in the total number of members dying compared to previous years. However, this also has its challenges - any change could be obscured by the natural variations in mortality rates seen year-on-year, and any deviation will only be statistically credible for the largest schemes.
Setting an assumption based on experience including all Covid-19 deaths implicitly implies pandemics will be the new norm. Stripping out deaths over 2020 due to Covid-19 effectively implies the pandemic is a one-off event.
What this means is that, for most schemes, considering the number of deaths over 2020 will not easily assist in setting a robust mortality assumption at this time.
Longer-term trends
Altering the mortality rates in the long term represents a view that the pandemic has fundamentally and enduringly changed the nation’s health. Judging the short-to-medium-term impact is tricky, and the long term is even tougher. Although Covid-19 is occupying the headlines at the moment, levels of mortality in the long term will also be driven by many other, perhaps more significant, factors. This includes developments in medical treatment and prevention, technology, lifestyle and the environment.
Actions
- Consider looking at the emerging mortality experience of your scheme, see how it compares to previous years and ask your adviser whether any change is statistically credible
- Discuss with your adviser how the financial position changes under plausible scenarios for the number of Covid-related deaths over the short-to-medium term
- Review your mortality assumptions, consider if any changes are necessary or material at this point in time, and keep them under consideration
Given the current level of uncertainty, I envisage that many of you will conclude that you will adjust your liabilities to reflect Covid-19 by a small amount or not at all at this stage.
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