The Pensions Regulator has warned against hasty reactions to the Covid-19 pandemic, saying it is still “early days” in our understanding of how the virus has impacted longevity and life expectancy assumptions.
Speaking to LCP partner Steven Taylor, TPR’s executive director of regulatory policy, analysis and advice, David Fairs, cautioned that schemes thinking of reducing technical provisions based solely on existing Covid-19 mortality projections should consider what happens if they prove to be inaccurate.
“We have seen quite wide variations in commentary around the impact [of Covid-19],” Fairs said.
To weaken an actuarial basis to incorporate assumptions about higher mortality rates would be to run a real risk of underestimating long-term trends
Tim Middleton, PMI
“We think it’s quite early days to understand what the long term consequences of Covid are. So where trustees are taking on board changes in mortality and perhaps reducing their technical provisions, as a result of that we are asking them to think about the consequences if these things then don’t play out in practice.”
Fairs said this area will be covered in more detail in TPR’s forthcoming annual funding statement.
Taylor welcomed the news, and said TPR’s insights on mortality “will be of interest both to trustees in upcoming funding valuations and also to sponsors as they consider the life expectancy assumptions used in their financial statements”.
“The regulator expects schemes to take care when updating these assumptions in light of Covid-19 in case experience turns out differently, and so this area has the potential to be another driver of contingent funding mechanisms in upcoming valuations.”
‘Far too early’ to assess pandemic’s impact
Tim Middleton, director of policy and external affairs at the Pensions Management Institute, told Pensions Expert that it is still “far too early” to assess the pandemic’s longer-term demographic impacts.
“To weaken an actuarial basis to incorporate assumptions about higher mortality rates would be to run a real risk of underestimating long-term trends,” he warned.
“Trustees and their advisers are far more likely to adopt a more cautious approach. At the same time, trustees will need to assess the economic impact of the double whammy presented by Covid and Brexit.
“This is likely to have a more significant impact on assumptions as the economy contracts and expected rates of return are reduced.”
Jon Palin, partner and senior longevity consultant at Barnett Waddingham, concurred and argued that it will probably be “several years” before we fully understand the impact of the pandemic.
He said that in the meantime “pension schemes should consider carefully whether it is appropriate to reduce their life expectancy assumptions”.
“Deaths from Covid-19 in the UK have fallen dramatically in recent months, and mortality is currently lower than normal for the time of year. However, the global picture is worrying and there is potential for variants of Covid-19 to be with us for many years to come,” Palin explained.
“As well as the direct impacts of the pandemic, including long Covid and the reduction in the amount of routine healthcare that pensioners were able to access during lockdown, there are also concerns over the strength and speed of economic recovery and how that might affect spending on health and social care.”
In spite of this, he added that “we cannot be confident” the pandemic will in fact lead to lower future life expectancy. Indeed, should certain lessons be learnt that lead to better overall hygiene, less seasonal flu and better preparedness for future pandemics, there might even be a positive impact on longevity.
“It is also important to recognise the differing impact of the pandemic on different parts of society,” Palin continued.
“Pension scheme liabilities are typically weighted towards more affluent pensioners, who appear to have been affected less than the population as a whole.”
‘Evolution not revolution’
In conversation with LCP, Fairs touched on a number of other topics including superfunds, the new defined benefit funding code, and its forthcoming annual funding statement.
Of the latter, Fairs said it would represent “evolution not revolution”, a “continuation of many of the things that we said in last year’s annual funding statement, but picking up on some of the themes”.
Among the areas the statement will cover in more detail are Brexit and its consequences, and the impact on covenants as the government begins to withdraw pandemic support packages.
“But because we are so close to the second funding code consultation, there won’t be any radical departures from the previous year,” he said.
Aon partner Paul McGlone drew a link between uncertainty around longevity and uncertainty about sponsor covenants. He told Pensions Expert that making any sweeping statements about the latter is equally unwise.
“There will be those who are relying on government support for whom it’ll be a big problem when it goes, and there will be those for whom it doesn’t actually make a substantial difference,” he said.
“The biggest issue that trustees have had for the past year has been: will my sponsor survive Covid-19. Then, if they do, what sort of state are they going to be in?
“It’s a bit like deaths and long Covid — there is a risk that you die, but there’s also a risk you don’t die but you suffer serious long-term consequences.”
That is what trustees are now grappling with, McGlone continued. “For a lot of valuations with covenant assessments, the answer is, really, we don’t know right now because how can you make a projection of the long term when you’re in the middle of the storm?”
Superfunds’ wait continues…
Fairs also touched on superfunds and consolidators, explaining that though the regulator published its interim guidance last year, “we haven’t yet got to the stage where we have completed an assessment where the funders met all our requirements”.
“We have said that once a superfund meets all our requirements and completes an assessment process, we’ll publish their names on our website. And as you know, there aren’t any names there just yet.”
Govt should boost CDC pensions to rebalance consumer risk
The Institute and Faculty of Actuaries has proposed a number of measures to tackle the so-called ‘great risk transfer’, among which is a call on the government to emphasise the benefits of collective defined contribution schemes as an alternative to traditional DC pension arrangements.
He added that TPR continues to work with the Department for Work and Pensions on a “full authorisation regime”, and the pensions minister is keen to publish a response to the superfunds consultation, which should be expected “very soon”.
However, he branded the impending introduction of collective defined contribution schemes “an exciting new area”, and added that from conversations with advisory companies, the indication is that “there may be broader interest in CDC schemes”, albeit there is a lot of regulatory work to finish before their debut.
