Defined benefit pension liabilities could be cut by 2 per cent as a result of Covid and other mortality factors says LCP.
LCP’s Health Analytics team examined the drivers of change in mortality rates and concluded that there is rationale to support a reduction of up to 2 per cent of IAS19 liabilities in certain circumstances.
LCP’s research found that this is due to the impact of Covid-19, fewer diagnoses and higher rates of death caused by factors such as coronary heart disease, stroke, and cancer. This translates to a £10 billion reduction in liabilities for the FTSE100 and a £35 billion reduction in liabilities for all UK pension schemes.
According to LCP’s Pensions Explorer’s most recent analysis of FTSE100 pension positions, the combined IAS19 surplus now stands at around £60 billion as of 31 December 2021, up from £50 billion at the start of 2021.
While the next set of core mortality projections due to be released in March this year does not place any weight on pandemic mortality data, LCP are advising companies to consider adjusting assumptions now to reflect the current position, depending on the specific circumstances of the scheme. According to LCP, inflationary shocks and changes in life expectancy assumptions will be critical issues for scheme sponsors to consider at the start of this year.
With annual inflation figures reaching highs near the end of 2021, where RPI hit 7.1 per cent and CPI 5.1 per cent, increases granted to pension scheme members could have been significantly higher than allowed for in corporate accounting figures. LCP believes that inflation has already weakened UK corporate balance sheets by around £20 billion as a result of the impact on pension scheme valuations and that this could get much worse if it proves to be more than a passing fad. As a result, LCP is urging companies to review their pension scheme’s investment and hedging strategies to ensure they are still appropriate and that they are aware of the level of risk.
LCP partner Jonathan Griffith says: “There is an element of deja-vu as scheme sponsors deal with another year-end against the economic backdrop of Covid uncertainty. Whilst the position of FTSE100 pensions schemes is thankfully much improved relative to 12 months ago, there will still be a lot for scheme sponsors to consider. Calm heads are needed to navigate some of the big issues this year and their material impact on schemes and actual cash payments in future. This includes the recent high inflation figures and how best to adjust mortality assumptions to allow for the impact of the pandemic.”
