Mounting Covid-19 death toll a bitter reprieve for pension schemes

For over a century, the average life expectancy has consistently climbed in the UK. But while advances in health were welcomed by society as a whole, the ageing population has put a strain on defined benefit pension schemes, which have had to pay out more and more money to retirees as a result.

It is a sad point, but members dying earlier than expected means it is easier to run the scheme

Andrew Patten, Fieldfisher

This trend had begun to level off in the last decade, with a February review by Sir Michael Marmot finding that longevity improvements had stalled in the UK since 2010. Now the coronavirus pandemic, which is disproportionately affecting the elderly, could set average life expectancy back for the first time in living memory.

“The year was starting very well,” said Steven Baxter, head of innovation and data at longevity consultant Club Vita. “We were almost thinking we could be talking about a story where we would be returning to some stronger gains in life expectancy. 

“Covid-19 has not just put the brakes on that, it is going to completely reverse. It is going to be an unprecedented high-death year.”

A sad point

According to research by Club Vita, the UK death toll from the coronavirus pandemic has already reached 60,000 – double the official tally published by the government, which only includes fatalities where Covid-19 was mentioned on the death certificate.

Accounting for deaths caused indirectly by the pandemic, such as those that would not have occurred if health services were less stretched, revealed how dramatically this year has overturned the prolonged downward trend in mortality rates. The Continuous Mortality Investigation at the Institute and Faculty of Actuaries estimated the UK has so far seen around 55,000 more fatalities than there would have been, had the proportion of deaths stayed the same as 2019.

This startling surge in overall fatalities came as a belated, though undoubtedly bitter, reprieve for pension schemes that had been increasingly stretched as members lived longer.

As Andrew Patten, pensions director at law firm Fieldfisher, said: “It is a sad point, but members dying earlier than expected means it is easier to run the scheme because you don’t have to pay benefits for as long as you thought.”

One step forward

However, experts warned that the growing number of deaths this year will not plug the gaping deficits already facing defined benefit schemes, which have had to continue making fixed payments to pensioners even as they lived longer. According to an index of 5,422 DB schemes compiled by the Pension Protection Fund, the combined deficit stood at £74.7bn at the end of January. 

This funding shortfall has only gotten larger since then, soaring to £135.9bn in just two months as businesses shut down, companies suspended dividends and markets were whiplashed by the pandemic.

Figuratively speaking, this year has been “10 steps back on the asset side, one step forward on the mortality side” for pension funds, said Matthew Edwards, chair of the CMI executive committee.

Moreover, the effect of this year’s increase in death rates on pension schemes might not be as significant as one would immediately expect.

“I don’t think pensions will get a big mortality boost from Covid-19, not nearly as big as we might think,” said Henry Tapper, chief executive of pensions consolidator AgeWage. 

“The most likely people to die are in very high age groups and in high levels of social deprivation. There we are talking about pensioners who are very close to death, also we are looking at people who have not got defined benefit pensions.”

The next step

While uncertainty persists around the lasting health implications of the pandemic, experts are unsure what the long-term impact could be on DB funds. The disproportionate effect it has had on poorer communities could, however, already be giving trustees cause to rethink how they assess funding levels.

“Liabilities tend to be biased towards the people with the highest pension amounts,” said Mr Baxter. “The [demographics] that drive the assessment of liabilities look different to the mixture of the population as a whole.

“[Covid-19] will certainly put a spotlight on understanding the socio-economic demographics of any pension scheme,” he added. “[Trustees] really need to see how it is panning out and how this might impact how they assess liability and risk.”

But while we remain in the midst of the crisis, experts warned trustees against making any hasty adjustments.

“At this stage it is too early to tell what 2020 will look like, although it is already clear that we will see substantially higher mortality rates,” said Paul McGlone, an actuary at Aon. “Impact on future life expectancy is unknown, but it is certainly too early to be changing assumptions in valuations or other calculations.”