Impact of COVID-19 on life expectancy could reduce pension scheme liabilities by up to £90bn

  • New XPS forecasting shows long-term vulnerabilities in pension schemes following the pandemic.
  • In some scenarios the long-term economic impact of COVID-19 on life expectancy could be 50% higher than the short-term impact of the pandemic.
  • The economic impact on schemes’ assets is also a significant consideration. Especially for those schemes holding growth assets and/or with low hedging ratios.

22nd July 2020: XPS forecasts that the long-term impact of COVID-19 on life expectancy could cause a reduction in liabilities by as much as 5% across the DB universe, according to its newly launched COVID-19 Impact Analytics. This new service is the third and final element in XPS’ COVID-19 response which provides pension schemes with a holistic view of the pandemic, including:

  1. The impact of the virus on different population groups via the XPS COVID-19 Tracker, which consolidates publicly available data on the pandemic in one place.
  2. The impact of the virus at an individual scheme level via the Scheme Vulnerability Analysis, which takes into consideration factors such as where members live and prior health conditions.

XPS’ COVID-19 Impact Analytics combines the findings of the COVID-19 Tracker and Scheme Vulnerability Analysis to provide trustees and sponsors with a complete view of the potential long-term impact of COVID-19. For the first time pension schemes can be modelled against five different scenarios, ranging from minimal disruption to a global depression.

The analysis also considers key risk factors that could further affect how a scheme will be affected in these scenarios. These include the ratio of males to females and the proportion of members at older ages, living in highly impacted regions, in ill-health or living in areas of high deprivation.  

In every scenario the impact on the scheme’s investments is also considered alongside the change in liabilities so that trustees and sponsors can consider an integrated view of the full range of risks a scheme faces due to the pandemic.

Steve Leake, XPS Head of Demographics said: “Trustees are anxious for information on how COVID-19 will affect their scheme. As the answer relies on so many unknown factors, we believe it is necessary to consider a full range of potential scenarios and we have used an innovative combination of traditional actuarial methods and modern data science techniques to deliver a ground-breaking analysis of the economic and disease impacts on scheme funding over the long term.”

Dan Auton, Longevity Analytics Head at XPS added: “This really is a significant step forward in terms of the level of insight and analysis on the potential impact of COVID-19 that until now has not been available to pension schemes. Trustees can now make accurate decisions based on the specific characteristics of scheme members, as well as the severity of the pandemic.

“This new analysis cuts through the noise and presents a scheme-specific impact.  It gives trustees and sponsors a much greater understanding of how their members and the scheme’s funding position may be impacted and, with the pandemic likely to continue into 2021, also maps the risks that look set to be a reality for some time to come.”

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