Pension schemes are failing to take into account the mortality impact of Covid-19, and could be overestimating liabilities by up to 3.5 per cent, according to XPS.
Its Covid-19 Impact Analytics provides a holistic view of the pandemic and calculates some schemes may be overstating liabilities by between 1.5 and 3.5 per cent.
The range would imply a potential reduction in UK company accounting pension costs of between £25bn and £60bn. XPS research shows that over 60 companies who reflected the pandemic in their December accounts made an average adjustment of 2.5 per cent, equivalent to a £40bn fall in UK liabilities if extrapolated to all schemes.
It says a year on from the start of Covid-19 being declared a pandemic the full impact on member longevity is now clearer.
However XPS adds 2020 was a significant shock and the long-term impact on mortality will most likely take several years to fully unwind. In order to accurately account for the pandemic, schemes will need to consider: the size of the shock, its duration and what the ‘new normal’ will look like once restrictions lift.
Currently many schemes have viewed 2020 in isolation and have not factored in the long-term consequences.
It says that ‘Long Covid’ is an important consideration, as are delays to healthcare treatments, for example for cancer and dementia.
XPS believes that these factors, alongside slow economic growth, will lead to a higher death rate. Whilst other changes may have a positive impact, such as any increase in healthcare spending and potentially better health of those surviving Covid-19. However XPS says its assessment shows the negative impacts are likely to outweigh the positives.
XPS considers a full range of scenarios, from ‘health rebound’ through to ‘new strains of Covid-19 emerging’, taking into account the key socio-economic characteristics of the members. These include age, location, health and affluence.
The default parameters in the Institute and Faculty of Actuaries’ Continuous Mortality Investigation (CMI) model – the industry standard tool for longevity – treat 2020 as an outlier with no impact on mortality in the long-term.
Whilst the tool allows adjustments to take into account the pandemic, judgements about how to do so are left to individual schemes. XPS believes that its Covid-19 Impact Analytics allows schemes to understand the range of likely outcomes and then consider how best to calibrate the model.
These findings are particularly significant in a low interest rate environment, as valuations of liabilities are high and more sensitive to changes in underlying demographic assumptions.
XPS head of demographics Steve Leake says: “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.”