Covid-19 has cost more than 80,000 people in the UK their lives so far, and although better knowledge of the disease means the likelihood of dying from it is now lower, could there still be a longer-term impact on defined benefit pension schemes? 

 

Between the start of the pandemic in March last year and last Christmas, there have been around 75,000 more deaths in the UK compared with 2019, according to the Institute and Faculty of Actuaries. Of these excess deaths, 14,200 happened during the second wave. 

 

The new strains of the virus are pushing infection rates to new heights, with some London hospitals operating in disaster medicine mode, saying they cannot provide high standard critical care now; mayor Sadiq Khan declared a major incident for London on Friday in a bid to fast-track help for the NHS, which in the capital is on the brink of being overwhelmed. 

 

  

“Although the final ONS data for 2020 is not yet available, we expect mortality rates for 2020 to be 13-14% higher than in 2019,” said Cobus Daneel, who chairs the IFoA’s CMI Mortality Projections Committee, the largest year-on-year increase in recent history.   

 

“Our calculations show that you would need to go back as far as 1929 to see a similar increase, a time when mortality rates were much more volatile and recording of population and death statistics less robust,” he noted. 

 

Total deaths up to Christmas day 2020 were 667,000, compared with 584,000 in 2019. 

 

 

However, the extent to which individual pension schemes are affected will depend on the age-profile and geographical spread of their membership, he added, as well as the views of scheme actuaries and trustees on future mortality.  

 

“The longer-term path of mortality rates typically has a much greater impact on pension scheme funding than year-to-year volatility. Therefore, it is likely that the longer-term consequences of the pandemic, which are still very unclear, will play a bigger role than the mortality experience over the past year,” he thinks. 

 

The CMI has consulted on how to allow for the abnormal 2020 experience in the next version of CMI Model, due for release in March 2021. The consultation found widespread support, including among actuarial consultancies, for changes to the model that will result in a fairly modest fall in projected life expectancy of less than 0.5%. 

 

"The CMI expects that it may take some time for the full effect of the pandemic to feed through to pension scheme funding levels,” said Daneel. 

 

 

Others agree that the short-term impact on pension schemes has been negligible. 

 

“Most scheme liabilities relate to younger members who are in the lower risk age groups,” said Susan Hanlon, a senior associate at consultancy Mercer. While mortality in those younger age groups is still higher than in previous years, the effect on liabilities will also be smaller because usually a spouse’s or other dependant’s pension still needs to be paid. 

 

 

And, said Hanlon, “there is also a socio-economic point with Covid-19 and the impact on pension schemes. We are seeing more deaths from Covid-19 in lower socio-economic groups who are less likely to be DB scheme members.” 

 

Although some smaller schemes, which can’t average across the scheme population, might see a stronger effect – especially if they are located in high-risk areas or their members tend to earn lower wages - “over our client base we are seeing quite a small impact”, said Hanlon; discount rate movements and asset performance are still having a bigger effect. 

 

 

What the longer-term impact of Covid-19 and lockdowns will be on mortality is also unclear, and so assumptions on future longevity should not be adjusted at the moment, she noted. “Our advice has been that it’s too early,” she said. While there could be increased mortality from illnesses like cancer, which are seeing treatment delays, there could be gains from greater awareness of infectious diseases and resulting lower flu deaths, for example. 

 

“Depending on how things look into 2021, there might be some short-term adjustments, but in terms of longer-term trends, it could take three, five or 10 years” until the impact of the pandemic on mortality is clear, she said. 

 

Others however, do take a view on future developments. Matthew Plail, senior consultant at XPS Pensions Group, said that “moving into the future, we expect longevity to generally reduce” because the direct impact of continuing Covid deaths, albeit mitigated over time by vaccines, as well as complications from the virus. 

 

He also expects an indirect impact on mortality from NHS ‘catch-up’ on missed treatments, as well as a recession and higher unemployment, which are historically linked to a reduction in future mortality improvements. 

 

How a given scheme is affected depends on each scheme. "To assess the likely direct impact of Covid, we capture infection rates by location and analyse age, sex and whether the members have a higher than normal exposure to underlying health conditions associated with Covid,” said Plail, while deprivation levels are also considered. 

 

“Many corporate clients have started to factor this into disclosures for company accounts, and we have started to take this to our trustee clients. This is clearly something trustees should consider and will need to take a view on, not least to set parameters for the CMI2020 projection model,” he argued. 

 

Depending on health and deprivation in the scheme population, liability reductions range from 1.5% to 3.5% across XPS clients, he said. “This can be significant when applied to deficits because of a gearing effect,” he added.