Market Swings 'Outweigh Lower Longevity Risks' In Pensions

By Martin Croucher
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Law360, London (June 22, 2020, 5:01 PM BST) -- A decline in longevity risk for defined benefit pension schemes as a result of the COVID-19 outbreak has been overshadowed by an increase in liability values caused by market swings, a retirement consultancy said Monday.

Lane Clark & Peacock LLP said that although mortality rates in the U.K. have increased significantly since 2019, that has translated into only a 0.25% fall in liabilities for DB pension schemes.

That means a probable reduction across the sector of £5 billion ($6.2 billion) in liabilities — total liabilities are £2 trillion. However, that saving was dwarfed by the estimated £50 billion that was added to liability values because of falling markets and ultra-low interest rates, Lane Clark said.

"The global impact of COVID-19 has been far-reaching, but it appears that so far it has been market movements that have had a far bigger impact on scheme funding than changes to longevity, although this could all change in the coming months and years," Michelle Wright, the head of trustee consulting at Lane Clark, said.

The company said the impact would probably vary based on the membership of defined benefit schemes: on whether they lived mainly in deprived areas or were from ethnic minority groups, both of which have seen higher mortality risk.

More than 42,000 people are confirmed to have died from COVID-19 in the U.K., making it the third worst hit country in the world.

Lane Clark said there were 60,000 excess deaths in England and Wales by the end of May, an increase of 11% from January to May in 2019.

The company said the long-term effect on pensions schemes is likely to depend on whether there are second waves of the virus, whether a vaccine can be found and the severity of the recession that follows.

"These factors, particularly the impact of a severe recession, could have far bigger consequences than the immediate impact of COVID-19 in 2020," Chris Tavener, a partner at LCP, said.

LCP said that although recession would have the obvious impact on investment performance it could also increase longevity risk, which is the risk that comes with increasing life expectancy among retirees and policy holders. The company said it was a "subject of academic interest" that recessions have been consistently linked with an increase in life expectancy.

"Since studies of the American population in the early 20th century, the same result has been repeated across different time periods and in different countries," Ben Rees, a consultant at the company, said.

--Editing by Alyssa Miller.

For a reprint of this article, please contact reprints@law360.com.

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