Understanding the effect of the coronavirus pandemic on mortality rates has “shot to the top of pension scheme agendas”, according to consultancy Barnett Waddingham.
The financial fallout of the pandemic was “now largely behind us”, and the impact on life expectancy could lead to a significant improvement in endgame timings, it said.
According to Barnett Waddingham, the economic circumstances of COVID-19 have led to the aggregate buyout deficit of the defined benefit (DB) schemes of FTSE350 companies falling by £80bn (€93bn) since the end of May last year, to a total of £130bn.
It has calculated that the average time to buyout for FTSE350 DB schemes could within the next 12 months fall by 35% in a worst-case scenario for life expectancy. This would put the schemes on track to reach their endgame in March 2026 rather than October 2028, as currently estimated.
In the most positive scenario for life expectancy following the pandemic, the time to buyout would be pushed back up to eight years and three months, a 10-month increase to August 2029.
“Realistically, the actual outcome would likely fall somewhere within this range,” the consultancy said.
Negative consequences for life expectancy following the pandemic could be missed medical diagnoses and treatments, and an unusual 2021/2022 winter influenza season, while improved public hygiene and a stronger post-pandemic population are possible positive consequences for life expectancy.
“They’re not just considering the potential impact of the pandemic, but also the general slowdown in mortality improvements in recent years”
Simon Bramwell, principal and head of longevity risk transactions at Barnett Waddingham
Simon Bramwell, principal and head of longevity risk transactions at Barnett Waddingham, told IPE there has been a significant increase in pension schemes discussing the setting of long-term life expectancy and how to manage their longevity risk.
“This is particularly true with schemes approaching their triennial actuarial valuation,” he added. “They’re not just considering the potential impact of the pandemic, but also the general slowdown in mortality improvements in recent years which are expected to further improve their funding levels at this valuation and hence the timing towards buy-out.”
In a statement, Bramwell said: “While the worst of the financial shockwaves has passed the longer term impact of the pandemic on our society, and the life expectancies of our population, is far from understood or certain. It is of course a sensitive subject, but trustees and companies must take these considerations into their journey plans if they hope to take strategic action and manage their funding positions.
”Despite record volumes of pension de-risking activity in the last few years – with more than £100bn of UK DB pension scheme liabilities being transferred over 2019 and 2020 – there remains a substantial amount of DB pension scheme risk on FTSE350 company balance sheets.”