In early February 2020, I had just returned from a trip to the French Alps. At that point, there had been some murmurings of a virus coming from China that was heading in Europe’s direction. As I took the same return trip earlier this month, I couldn’t help but reflect on the profound impact that virus has had and the lasting effect it will continue to have for some time yet.
Back in February 2020, the word peak conjured up images of the heights that I had, for the prior week and to varying degrees of success, attempted to ski down. It didn’t bring to mind the two spikes in graphs conveying an unimaginable number of deaths in April and May of 2020, and latterly in January 2021. Also, had someone mentioned the letter R back then, even as an actuary, I couldn’t have imagined that the statistical measure I learned about in my university days would have become common place in mainstream media.
Two years on from my initial trip, there now seems to be some cause for optimism. According to the Continuous Mortality Investigation (“CMI”), the level of deaths in England & Wales in the final week of January 2022 (22-28 January) was similar to that experienced in the corresponding week in 2019. More specifically, the CMI makes reference to a measure called ‘excess deaths’. This measure compares the number of deaths that would be expected within the population of England & Wales if deaths followed the same pattern as in the corresponding period in 2019. The idea here is that January 2019 was ‘pre COVID’ and as a result the pattern of deaths was based on a period that we may at some point over the past two years have been classified as the ‘old normal’. It should be noted, however, that while this excess deaths measure may give some indication of deaths relating directly to COVID, it likely also includes deaths indirectly related to COVID, e.g. late detection of diseases arising during the pandemic.
So, what is the impact of COVID on DB schemes?
I think we will all agree that this is good news. For those of us working in the world of defined benefit (DB) pensions, however, we must continue assessing the impact that the pandemic has had, and will continue to have, on our schemes. This, as far as I can tell, can be considered in two parts.
Firstly, the ‘experience’ over the course of the pandemic
It is an uncomfortable reality for pensions actuaries that we analyse, amongst other things, how well our assumptions relating to deaths of scheme members have played out in practice between actuarial valuations.
An unfortunate phrase in the lexicon of actuarial jargon is ‘a funding gain’. A funding gain generally means that the experience of the scheme (i.e. what actually happened) between valuations has been, in some sense, more favourable from a scheme funding perspective, than if the Scheme Actuary’s assumptions had come to pass. In relation to deaths, this translates to more member deaths than the Scheme Actuary expected. All else being equal, this would improve the scheme’s funding position and reduce the long-term cost of paying scheme benefits.
Depending on the profile of the scheme, the extent to which its membership has been affected by COVID and the Scheme Actuary’s assumptions at the actuarial valuation prior to the pandemic, the impact of any COVID-related deaths may present itself as a funding gain to the scheme. To the extent that this impact is material in the context of the scheme’s funding position, the Scheme Actuary may show this in the scheme’s analysis of surplus at the next actuarial valuation.
I would encourage trustees, particularly if they believe that their scheme has been adversely affected by COVID-related deaths, to consider this issue when discussing changes in the funding position with their Scheme Actuary.
Secondly, the ongoing risks posed to scheme funding
Despite the cause for optimism noted above, trustees and sponsors should consider the continued risks posed by COVID.
Although we are now almost two years into COVID, I still don’t think we can say with any great certainty what the longer-term impacts of the pandemic will be. For example, how will ‘long COVID’ affect scheme members’ long-term health and deaths? Further, what will the long-term impact be of late detection of non-COVID diseases, given the focus on COVID during the pandemic? On the flip side, perhaps the pandemic will result in a positive impact of members’ health – will the public remain health-conscious, resulting in early detection of potential diseases?
What action can trustees and sponsors take?
Despite not having certainty on the longer-term impact, steps can be taken to manage the risks posed.
Trustees and sponsors should, with the help of their actuary, regularly monitor the latest developments relating to the longer-term impacts of COVID and the impact on their scheme members.
The mortality-related assumptions for scheme funding calculations or accounting disclosures should be appropriate to the particular scheme. For example, in the CMI model of mortality improvements, there are various levers that the actuary can pull on to improve the suitability of the resultant mortality improvement assumptions for a particular scheme.
Further, trustees and/or sponsors may consider commissioning a scheme-specific mortality analysis. This kind of analysis looks at the characteristics of a scheme’s membership and produces valuation assumptions that are highly tailored to the scheme in question.