UK company accounts could be overstating pension liabilities by up to £60bn due to the COVID-19 pandemic, according to research from XPS Pensions.
The pension consultancy firm said that, although COVID-19 deaths have had a visible impact on life expectancy, the wider economic and healthcare implications of the pandemic will have an impact too.
It found that life expectancy of pension scheme members will be lower than assumed by companies last year, reducing the cost of pension promises by 1.5% to 3.5%, depending on the membership of a scheme.
Across all UK defined benefit (DB) pension schemes, this would mean a £25bn to £60bn reduction in the cost of pensions measured on an accounting basis.
“Companies should take this into account in corporate reporting,” said Simon Reddish, head of accounting for pensions at XPS Pensions. “This will ensure that mortality assumptions remain best estimate, and avoid overstating pension obligations.
“Schemes must consider the impact of the pandemic on their portfolios in the round, and that means taking into account the impact of the pandemic on life expectancy as well as on financial assumptions.”
Accounting standards require companies to use best estimate assumptions to determine the value placed on DB pensions promises, and the Financial Reporting Council (FRC) has given particular scrutiny to mortality assumptions, as these can vary significantly between schemes.
The latest XPS forecasts come after the company launched its COVID-19 Impact Analytics earlier this year, which provides UK pension schemes with a holistic view of the virus.
“We believe it is necessary to consider a full range of potential scenarios,” said Steve Leake, XPS head of demographics.
“We have used an innovative combination of traditional actuarial methods and modern data science techniques to deliver a ground-breaking analysis of the economic and disease impacts on scheme funding over the long term.”
Image credit: iStock
Author: Chris Seekings