Covid-19's effect on longevity assumptions

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Covid-19's effect on longevity assumptions
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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.

Schemes may like to consider placing less weight on experience during the pandemic, especially when a prudent approach is required. -- GAD document

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. 

Commentators from the pensions industry agree it is too early to say whether Covid-19 will affect longer-term longevity assumptions, or if the vaccinations will make Covid-19 a blip rather than a blot on the actuarial landscape.

Steven Cameron, public affairs director for Aegon, says: "It’s too early to draw any conclusions over whether Covid-19 will have longer-term implications on future mortality or morbidity trends.

"The development of a range of vaccines is a very positive development, although the emergence of variants is also relevant here."

Similarly, Sophia Dimitriadis, research fellow at the International Longevity Centre UK, comments: "It’s probably too early to tell, as there are lots of factors at play, how Covid-19 will affect mortality/life expectancy in the long term, as well as the future of pension funds."

Early retirement

But amid the high-level discussions around mortality rates and scheme funding is another trend, one that is affecting individual clients as they assess their own financial futures: people are taking their pension earlier than expected.

Research from both the Office for National Statistics and life and pensions provider LV earlier this year revealed more people over 50 are leaving full-time work and taking their pension ahead of their original start date. 

Since February 2020, the number of payroll employees has fallen by 828,000, according to the ONS. 

While many young people have been made redundant over the past year, the LV research (among those who were still working at the start of 2020) revealed:

  • 3 per cent (154,000) of those aged 55-64 have taken early retirement due to Covid.
  • 4 per cent (211,000) of people aged 55-64 have accessed some of their pensions savings to supplement their income because they have been made redundant or their earnings are reduced.

This might not affect mortality assumptions, but this does raise important questions about the longevity of the individual and the amount of stretch in their pension pots. 

Indeed, further ONS research in January 2021 found employee and employer contributions to defined contribution schemes fell by 11 per cent and 5 per cent between quarter one and quarter two of 2020 respectively.

There is nothing wrong with wanting to spend, but if mortality rates are not actually going to change, and people's money still has to last the course, what dangers might be accruing to those changing their plans and retiring earlier than expected, especially if 2020's 'lost contributions' are not repaid?

David Stevens, savings and retirement proposition director for LV, says: "With increasing numbers of people looking to retire or access their pensions earlier, the need to save into pensions from earlier ages increases to ensure pension pots will last over a longer period and provide the level of income needed in retirement.

"Retiring earlier could indicate a more active retirement for a longer period – that will often require a larger income initially."

Tom Selby, senior analyst at AJ Bell, says Covid notwithstanding, people should still be planning for as long a lifespan as possible.

He explains: "Assuming the vaccine is effective then 2020 and 2021 may just be viewed as a bump in the road, with future years potentially seeing a return back to the long-term trend of rising life expectancy.

“As things stand, a healthy 65-year-old should still be planning for a retirement that lasts into their late 80s and beyond.”

The need for protection

According to Alan Chan, director for IFS Wealth & Pensions, Covid-19 has also brought to the fore the importance of having adequate protection in place for the client and their family.

He comments: "The clients’ financial plans are all built on the premise that clients will continue working all the way up until retirement in most cases and earning a salary to build for their future.

"Should the clients not be able to work anymore, whether that’s due to ill-health or death, then they run the risk of their financial plans failing."

Chan says this risk is often overlooked by clients but this can have a large and devastating impact, adding: "In terms of retirement planning, it reinforces the benefit of building a robust financial plan that has been stress tested to withstand severe market shocks and to have a plan B if things do not pan out as we wish."

simoney.kyriakou@ft.com