The UK's defined benefit (DB) pension schemes are unlikely to see a large fall in their liabilities due to the COVID-19 pandemic, research by Lane Clark & Peacock (LCP) suggests.
In a new report, LCP outlines how confining COVID-19 to two waves would cause life expectancy to shorten by an average of one month for people at the age of 65, resulting in a £4bn reduction in DB liabilities.
However, the researchers also explain how the pandemic could lead to less air pollution, a greater focus on holistic health, increased funding for the NHS, and valuable healthcare ramifications.
In this scenario, life expectancy would increase by four months at 65, while liabilities would increase by £21bn.
LCP said that only a “tragic COVID-19 scenario” with substantial additional deaths for many years would cause a significant reduction in liabilities.
“The pandemic has introduced more uncertainty and trying to understand the long-term impact of COVID-19 is challenging,” said Chris Tavener, author of the report.
“In order for there to be a significant reduction in pension scheme liabilities, we would have to assume that the pandemic will leave an everlasting hangover, with mortality rates higher than previously assumed for many, many years.”
In a worst-case scenario, where the pandemic remains a significant driver of long-term mortality trends, the researchers forecast 60,000 additional deaths in England and Wales every year, which would cut DB liabilities by 4%, or £67bn.
However, if schemes adopt the core assumptions of the Continuous Mortality Investigation's (CMI) latest model, this will represent a fall in liabilities of about 0.2%, translating to a four-week drop in life expectancy for men over 65, and one week for women.
The latest report also shows that an increasing number of deaths in private homes from leading non-COVID causes such as heart disease and cancer threatens to reverse improvements in chronic disease mortality, if they persist.
LCP is now urging trustees and sponsors to understand the make-up of their members and how they could be impacted by the pandemic as part of reviewing the mortality assumptions used to manage their schemes.
This is especially important as the latest CMI model gives schemes the flexibility to decide how relevant 2020 mortality numbers are for their individual scheme.
Tavener added: “With the vaccine programme well underway, we hope the long-term mortality implications of the pandemic are modest.”
Image credit: iStock
Author: Chris Seekings