Some pension schemes could see their liabilities increase following their next triennial valuation due to the impact of proposed new mortality calculations.
A new mortality model proposed by the Continuous Mortality Investigation (CMI) reflects improvements in life expectancy for older people, which could increase defined benefit (DB) pension scheme liabilities.
However, the model also shows a lower life expectancy at 25 and 45 than previous iterations, meaning the true impact on liabilities will vary depending on a scheme’s demographic profile.
The changes are more significant for men than women, with male life expectancy at 85 rising by two months, while female life expectancy will rise by one month under the new model.
The CMI’s new model is being consulted on and is due to be released in the second quarter of 2025.
Towers Watson has warned that, given the maturing nature of the DB sector, scheme liabilities are more likely to increase than decrease.
A mixed outlook for life expectancy
Stephen Caine, senior mortality consultant at Towers Watson, said: “The CMI’s proposals will lead to a more optimistic outlook for the life expectancies of older scheme members due to their bounce back to below pre-pandemic mortality rates and an anticipated reduction of the Covid-19 effect built into the model.
“Average mortality rates in 2024 may have returned to pre-pandemic levels but are still well above where we expected them to be by now based on the expectations in place before the pandemic.”
Stephen Caine, Towers Watson
“The outlook for younger members is less positive and reflects the challenges seen in the population for this age group in returning to pre-pandemic levels of health and mortality.”
Caine said DB pension schemes currently using the CMI’s 2023 model may experience “a small increase in liabilities”.
However, he added that schemes currently going through a triennial valuation could experience a drop in liabilities compared to the previous valuation that likely used the CMI’s 2021 model.
“Average mortality rates in 2024 may have returned to pre-pandemic levels but are still well above where we expected them to be by now based on the expectations in place before the pandemic, which were still reflected in the 2021 model,” he explained.
Caine added that schemes looking towards a near-term buy-in or buyout transaction will be more focused on how their insurers model mortality, which can be different to the CMI’s approach.
The effect of the Covid-19 pandemic
The CMI has also changed the way it has accounted for the Covid-19 pandemic. By using “overlays” to its model – rather than a “weighting” approach as adopted previously – it has reduced the skew effect of pandemic mortality on future mortality trends.
Cobus Daneel, chair of the CMI’s Mortality Projections Committee, explained: “The Covid-19 pandemic was challenging for all mortality projection models.
“It was uncertain how mortality rates would react beyond the initial shock and the CMI took a pragmatic approach, avoiding material revisions in projected life expectancies until a clearer picture emerged.”
He said the CMI could now move to improve its modelling and provide “a better fit to recent data across the full age range during and after the pandemic”.
“We recognise that different users of the model have different views,” Daneel said. “The CMI model provides a framework for them to adjust parameters to reflect their own portfolios and views on the impact of the pandemic, and to communicate those to others.”
The proposed model is open to feedback until 25 March.
