In Focus: Vulnerability  

Covid-19's effect on longevity assumptions

This article is part of
How to navigate decumulation post-Covid

Covid-19's effect on longevity assumptions
Image via Pexels

Covid-19 has left actuaries scratching their heads over longevity, scheme funding and mortality assumptions.

Mortality and morbidity projections have always been used by actuaries to help construct robust workplace pension schemes, making assumptions for the level of withdrawals made on the scheme's assets over time.

These have also been factored into pension planning for individuals, with modelling used to show each client what their projected income might be over their lifespan, and what steps they might need to take in the accumulation stages to grow that pot so it meets their goals post-retirement.

But Covid-19 has thrown the proverbial spanner into the works, and now the question is how to make financial provisions for a world where pandemics can rock global markets, knocking holes into pension schemes and the employer's ability to keep funding them.

Will higher mortality rates seen as a result of the pandemic help or hinder future actuarial assumptions?  

According to government data, it is still too early to state whether the short-term spike in mortality rates seen in 2020 and into 2021 will feed through into a longer-term decrease in projected mortality.

A three-page briefing note from the Government Actuary's Department, Making sense of Covid-19: Mortality impact on pension schemes, was published in August 2020.

It sought to make sense of the higher death rates among the pensioner population of workplace pension schemes in the UK.

Among its main findings was to suggest a wider lens should be used when assessing mortality, including considering other lifestyle factors, such as a reduction in smoking, better general health in old age and better long-term care than previous generations enjoyed.

In other words, despite the tragic effect Covid-19 is having on the older members of society particularly, the long-term mortality rates have not been affected drastically: each generation is still living longer than the one before.

Message for planners

The GAD document's message was that despite the short-term spike in deaths, particularly among men (see image below), scheme actuaries should not necessarily place too much emphasis on the Covid-19 years when doing forward projections. 

The document said: "A common approach to setting future mortality assumptions is to do so with reference to the actual scheme mortality experienced over the past few years.

"If Covid-19 leads to a short-term spike in mortality, then such a process could lead to future life expectancy being underestimated.

"To avoid this, schemes may like to consider placing less weight on experience during the pandemic, especially when a prudent approach is required."

It also recommended taking a case-by-case approach, which is something advisers have been doing with their individual clients for many years when it comes to assessing how long that pension pot might last.