Pension Plans Face £100B Funding Impact From COVID

By Martin Croucher
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Law360, London (May 25, 2021, 2:40 PM BST) -- Pension schemes could experience a £100 billion ($140 billion) swing in their liabilities in either direction depending on whether COVID-19 has a positive or negative effect on long-term life expectancy, a consultancy has warned.

Lane Clark & Peacock LLP urged trustees of retirement savings plans on Monday to avoid making rash decisions over funding of their schemes, based on predictions of so-called longevity risk. This is calculated as the chance that life expectancy and actual survival rates exceed expectations or pricing assumptions, which lead to higher-than-forecast cash flow needs for the insurance or pension sectors.

The life expectancy of members has a direct effect on the liabilities of their retirement plans. LCP said a one-year fall in the average lifespan would cause a corresponding £100 billion fall in the amount that schemes are required to pay out. But if members live a year longer than expected, liabilities will increase by £100 billion.

"Estimating how long people are going to live now and how that will change in the future needs careful judgement," LCP said in its report. "At this time, and to complicate matters further, no one yet knows whether this impact [of COVID-19] on pension scheme members will be positive or negative."

Previous reports have suggested that increased mortality rates from the virus could cut pension liabilities by £90 billion. Almost 3.5 million people have died from COVID-19 globally, 128,000 of which have been in the U.K.

But LCP said on Monday that there is an opposing view that those who have recovered from COVID-19 would have enhanced immunity to other influenza-type viruses or pandemics in the future, enabling them to live longer than expected. Longevity could also be affected by more government investment in vaccine research.

The warning from LCP echoes comments in April by The Pensions Regulator's executive director. David Fairs, who urged trustees to think before rushing to conclusions about longevity risk exposure.

"We think it's still quite early days to understand what the long-term consequences of [COVID-19] are," Fairs said in a podcast. "Where trustees are taking on board changes in mortality, and perhaps reducing their technical provisions as a result, we are asking them to think about the consequences if those things don't play out in practice."

--Editing by Joe Millis.

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