UK pension schemes could be overestimating their liabilities by up to 3.5% as a result of their failure to consider the long-term impacts of COVID-19, research by the XPS Pensions Group suggests.
After analysing 60 companies that reflected the impact of the pandemic in their accounts at the end of last year, the researchers found that these firms had made an average adjustment of 2.5% to their liabilities.
This would be equivalent to a £40bn reduction in liabilities if extrapolated to all pension schemes.
However, XPS warned that many schemes have viewed 2020 in isolation, and have not factored in the the full consequences COVID-19, such as delays to healthcare treatments and slow economic growth.
Although an increase in healthcare spending and other factors could improve mortality, the researchers believe that the negative impacts of the pandemic are likely to outweigh the positives.
After undertaking a holistic analysis, XPS said that pension liabilities could be overstated by between 1.5% and 3.5%, which would imply a potential reduction in accounting costs of between £25bn and £60bn.
“Without consideration of how the pandemic has affected their members, schemes risk overstating their liabilities by as much as 3.5% and ignoring key information when making decisions on risk management and long-term strategy,” said Steve Leake, head of demographics at XPS.
The Continuous Mortality Investigation's (CMI) new model for calculating life expectancy trends considers 2020 to be an outlier, although adjustments can be made to consider the impact of the pandemic.
XPS said that its COVID-19 Impact Analytics tool – which was used for its latest analysis – allows schemes to understand the range of likely outcomes from the pandemic and then consider how best to calibrate the CMI model.
This is thought to be particularly important in a low-interest rate environment, as valuations of liabilities are high and more sensitive to changes in underlying demographic assumptions.
“We cannot just ignore 2020 as the ramifications will last for some time,” Leake continued. “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.”
Image credit: iStock
Author: Chris Seekings