Posts Tagged ‘Covid-19’

Angela Burns

At the time of writing there has been a confirmed 34,800 deaths from Covid-19 in the UK, with around 246,000 confirmed live cases.

I recently attended a Webinar run by Prudential (The Impact of Covid-19 on Future Higher-Age Mortality) which had some interesting insights into the current situation and its future impact. 

Covid-19 is a global pandemic that has drastically changed our way of life. 

  • As individuals, we are wondering where the end point will be so that we can resume some form of normality and see our friends and family.
  • As pensions professionals, we are trying to understand this disease in detail to form a view on whether it will significantly affect rates of mortality and hence the ultimate cost of pension provision.
  • For schemes seeking an insurance solution (buy-in/buy-out), we are also trying to understand if it will significantly affect predictions about future mortality, and therefore impact on insurance premiums.

A recent bulletin produced by the CMI confirmed 56,000 to 63,000 registered deaths above what would be expected at this time of year based on ‘standard’ mortality tables. The CMI has confirmed increases of 58%, 116% and 144% (over what would be ‘expected’) in week 18, 17 and 16 of the pandemic respectively. If individuals die sooner than expected, then pension payments cease earlier, and the cost of provision is lower.

How will this impact scheme funding?

Actuarial valuations are carried out every three years. It is unlikely that a new valuation would be commissioned (out-with the three-year cycle) to simply allow for the effect of Covid-19. What we will likely see is a lower liability than expected, on average, at the next actuarial valuation, all other things being equal, as benefits have ceased earlier than expected due to Covid-19 deaths. The impact will be greater for younger deaths, with any liability ‘gain’ reducing as the member ages and nears their ‘expected’ date of death.  

There are around 10m members of defined benefit schemes in the UK and so the numbers of deaths at this point is relatively small in proportion. Given that most Covid-19 deaths are individuals age 65 and over, the average impact is also expected to be small. Schemes with a working-class population may see a larger than average impact as deaths are higher for lower socio-economic groups. However, the impact is still expected to be minor on average.

What should we assume going forward?

At this stage, the future impact of Covid-19 is unknown. It could ‘burn out’ (where the surviving population are strong enough to resist it), we could develop a vaccine, or it could continue to come in waves like the seasonal flu. The latter may result in an increase in long-term mortality rates, with the former resulting in reversion to ‘pre Covid-19’ mortality, or even a reduction in mortality rates to allow for anti-selection (where the remaining population are considered ‘healthier’ than the pre Covid-19 population). It is very early to estimate the long-term impact and data is being analysed every day as it is received. Overall, I don’t think we have any reason at present to be making drastic changes to our funding plans.

Hugh Nolan

Pensions aren’t anyway near the main concern for most people at the moment, with the industry having proved pretty robust in the face of a global pandemic that can only be described as unprecedented. A lot of schemes had investment strategies in place that have largely mitigated the impacts of incredible volatility in markets and stocks that have fallen by over a third. Administrators have managed to keep paying pensioners reliably and promptly every month. Even the quasi-Governmental Regulator has responded positively to the situation, with a pragmatic and sensible approach that recognises the difficulties faced by many sponsoring employers and allows even more flexibility than usual.

But there is often a sting in the tail for pension schemes. Some schemes had deliberately adopted a policy of investing in growth assets like equities as their only hope of removing sizeable deficits. Sponsoring employers who had been struggling to meet the rising financial demands of their schemes over the years had to rely on investment returns to remove this millstone from their necks. Such schemes may have seen material falls in their funding levels that make a difficult situation seem completely impossible now.

My message to these schemes is simple. Don’t give up hope! Although nothing can be absolutely guaranteed, I am confident that markets will eventually recover most of their losses from the last couple of months. I’m sure there will have been a real hit from the pandemic in the final analysis and GDP in Q2 will be absolutely dire but current predictions are that the economy can rebound strongly later in the year. It took a couple of years for normal service to be resumed after the credit crunch and could take even longer after the virus crisis. However, there is every chance that we will get back to normality soon enough for most pension schemes to get through to the other side safely, even in very challenging circumstances.

My colleague Simon Cohen, our Head of Investment Consulting, has obviously been watching market developments closely and continually reminds me not to panic about the falls we have seen. Pension scheme funding is a long-term venture and the extreme volatility we have seen recently is just a specific example of what we always knew could (and probably would) happen from time to time. Actuarial valuations can allow for an expected bounce in the markets at some point and longer recovery periods can be agreed where needed. Investment strategies can implement trigger points to derisk portfolios when market opportunities present themselves. Members can be reassured that their pensions are well protected, with funds held separate from the employer, with companies still committed to funding the schemes and with the PPF lifeboat in the background. Trustees can be supported and helped to keep making the decisions that are best for the schemes, however difficult those decisions may seem just at the moment.

Some people may wish they’d taken more control of their pension schemes before the pandemic hit us. It’s never too late to take positive action though and there are still ways to plan for the future with a degree of optimism. As they say, the best time to plant a tree is 20 years ago and the second best time to plant one is right now!

Stay safe everyone and we’ll see you on the other side.

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