The value of a typical defined benefit (DB) scheme’s liabilities might fall by less than 0.25% as a direct result of the deaths of pensioners arising from COVID-19 in 2020, LCP’s latest Longevity Report revealed.
The report, which was published yesterday, found the impact of COVID-19 on pension scheme liabilities has been dwarfed by movements in markets so far in 2020.
It said that the total UK DB liabilities are in the region of £2trn (€2.2trn), which means that the excess deaths in 2020 due to COVID-19 could reduce liabilities by less than £5bn.
This is a fraction of the total estimated increase in liability values of over £50bn since the start of the year as a result of falling markets and ultra low interest rates, the report said.
Michelle Wright, head of trustee consulting at LCP, said: “The global impact of COVID-19 has been far reaching but it appears that so far it has been market movements that have had a far bigger impact on scheme funding than changes to longevity, although this could all change in the coming months and years.”
The report said: “The ultimate impact of deaths due to the coronavirus on the funding of DB pensions will be driven more by the economic and social consequences of the pandemic following 2020, in particular a severe recession.”
The research also found that longevity insurers and reinsurers are making very little – if any – allowance for COVID-19 in their longevity assumptions at the moment.
“Any impact on the affordability of longevity hedging has therefore been dwarfed by the impact of changes to the financial markets due to the pandemic,” it concluded.
Chris Tavener, partner at LCP, said: “The direct financial impact of pensioners’ deaths in 2020 due to COVID-19 is relatively modest. It is not certain what the long-term impact will be with questions around whether there will be any second waves, if a vaccine is found and how severe a recession will be. These factors, particularly the impact of a severe recession, could have far bigger consequences than the immediate impact of COVID-19 in 2020.”
Pension risk transactions keep pace through lockdown
UK bulk annuities and longevity swaps markets remained active all throughout the lockdown, according to data from Willis Towers Watson (WTW), which showed insurers’ operating and financial models to be robust enough to withstand the recent instability.
Over the past few months, the widening of credit spreads created some exceptional pricing opportunities, the consultancy said.
For the most part, these opportunities were picked up by schemes where transactions were already partially in-process and could therefore capitalise on this pricing in the short-term, it said.
Similarly, schemes that had transacted previously were also in an advantageous position, in that they could complete a ‘repeat deal’ relatively quickly, it added.
Since the beginning of 2020, WTW has led 13 bulk annuities covering more than £3.1bn (€3.4bn) of liabilities, 12 of which took place during lockdown. The most recent deal includes IHS Markit only last month.
Shelly Beard, senior director at WTW, said: “It was the schemes that were already in the market who were able to take advantage of the strong pricing we have seen. Although credit spreads have narrowed again over the last eight weeks, there is still potential for more attractive pricing over the remainder of the year.”
She said this was due in part to potential market volatility, but also because insurers are likely to seek out ways to compensate for a fall in new business volumes.
“This could bring about the return of the ‘end of year sale’ for the first time in several years, whereby prices are cut as the year draws to a close. Schemes who wish to take advantage of that will need to get into the market shortly,” she added.
The firm expects bulk annuity transfer volumes in 2020 to reach around half of 2019 levels, at £20-25bn. Whilst this falls short of the £30bn predicted at the beginning of the year, pre-COVID-19, the market will remain busy, and the decline reflects the changes in affordability for some pension schemes.
Beard added: “Prior to COVID-19, the bulk annuity market was incredibly busy, as demand from pension schemes exceeded supply from insurers. Some schemes were therefore finding it hard to get quotes, creating the potential for pricing to drift upwards over the medium term. This slight reset of the market has restored more balanced market dynamics.”
Longevity swaps
The longevity swap market has also remained active throughout the year, with several transactions close to completing, WTW said, in a market that typically sees only a few transactions each year.
The consultancy predicted that 2020 would be record breaking in terms of the volume of longevity swap transactions, and it still expects this to be the case, with more than £25bn of new longevity swaps expected.
According to it data, there is significant appetite for reinsurers to take on new longevity swaps, reflecting the expected decline in business being directed to the bulk annuity market.
This is producing very attractive pricing, and in several cases, schemes have been able to hedge at little or no cost, relative to their technical provisions, it added.
Healthcare group scheme strikes buy-in deal with Aviva
The General Healthcare Group (GHG) Pension & Life Assurance Plan has secured a £150m (€163m) insurance contract with Aviva to cover all 700 of its defined benefit members. Redington, the scheme’s consultant, also advised on the deal.
The move was due to the scheme’s funding level dropping to less than 70% since the 2008 financial crisis, it said in a statement.
The deal took place on 16 March, during the height of the COVID-19 market turmoil. Despite this the transaction completed smoothly, well ahead of schedule and with scheme assets expected to cover all subsequent wind-up costs, it disclosed.
Alongside its funding challenges, the plan also faced financial constraints from its sponsor, BMI Healthcare. This meant the scheme could not put undue pressure on corporate finances by requesting high recovery contributions.
Rita Powell, founder of Inside Pensions and chair of trustees for the GHG plan, said: “We knew we needed a radical change in approach to overcome our difficulties, but as a small scheme with minimal resource we had to think differently to find the right solution.
“By focusing carefully on what really mattered and working closely with the sponsor and our investment and governance experts, the trustee was able to come up with a long-term funding plan that worked for all parties.”
Mette Hansen, director in Redington’s investment consulting practice, said: “Our focus was to establish a clear framework that would put the trustees in full control and get all stakeholders behind a shared objective.”
She said that for the scheme, the objective was to “generate sufficient investment returns to minimise the pressure on the sponsor, but importantly in a highly risk-managed way that enabled the trustees to retain full control in all market conditions”.
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