Covid-19 mortality rates– how will this impact the financial position of defined benefit pension schemes?

We all know that the global impact of the novel Coronavirus (Covid-19) has been far reaching, with significant implications for public health in the UK.

The tragically high number of people dying due to Covid-19 is rightly occupying the headlines at the moment as behind every statistic there is a human life. However, our analysis suggests that the ultimate impact of deaths due to Covid-19 on the funding of defined benefit pension schemes won’t be dominated by the experience in 2020, but will be driven more by the far-reaching after effects following the current pandemic. Factors such as any emergence of repeat waves of the virus, the repercussions on our health care system, and on peoples’ health from a deterioration in the financial strength of the economy could have far bigger consequences, and will ultimately determine the impact of Covid-19.

Impact so far

Over the last few weeks the ONS reported the highest number of registered deaths in England & Wales in any week since 1993, and over double the typical number of deaths for this time of year. Up until the start of May, there has been almost 50,000 more registered deaths in 2020 than to the same point in 2019. Although the number of weekly reported deaths due to Covid is currently falling, the number of so called “excess” deaths will be significantly higher by the end of the year.

Challenges with counting the number of fatalities due to Coronavirus

It is difficult to interpret weekly figures and measure the impact of Coronavirus – in particular, to apportion the total number of people who die each week between those deaths that are due to the Coronavirus and other reasons.

• The ONS publishes the number of people who have died where Covid-19 is mentioned on their death certificate as a suspected contributing factor, but the virus may not be the primary reason for death.
• A person may die due to Coronavirus that is undetected and so not recorded on their death certificate. This could be because it occurs outside of hospital where a test for Covid-19 wasn’t performed or symptoms were not obvious.
• A death not directly recorded as being due to Covid-19 may occur due to implications indirectly linked to this unprecedented and extreme situation. This includes: individuals not seeking medical assistance or support from their GP or in hospital where they have a serious or deteriorating health condition. Worryingly, attendances at A&E in April are down over 50% compared to last year, suggesting that people are not getting health issues checked because of fear of either catching the virus or taking up medical time.
• A fraction of those that have died may have been expected to die over the next few years, say due to underlying health conditions - regardless of whether they had been exposed to Coronavirus.

Consequently, a significant number of fatalities due to Covid-19, either directly or indirectly, may be going unrecognised. On the other side of the coin, some deaths reported as being due to Covid-19 may not be “excess” deaths above the typical levels normally seen in the UK.

Disentangling the Covid-19 deaths from those that would ordinarily be ‘expected’ at this time of the year is not straight forward. It is therefore useful and important to look at the total number of deaths to track trends, and it is clear that the number of deaths over the last few weeks is far higher than normally seen at this time of year in the UK.

Potential short-term impacts

It goes without saying that any unexpected deaths due to Coronavirus are tragic and the headlines of number of deaths being reported everyday make for sobering reading. What is the financial impact likely to be on a typical defined benefit pension scheme? We have pulled together some potential scenarios – these are not forecasts, but what-ifs.

Two key unknowns are: the level of extra deaths due to Coronavirus; and how frail those affected were. A refined model to gauge the potential financial impact is spurious with so much uncertainty.

So if we assume a simple model where the number of expected deaths in 2020 of members of a typical pension scheme increases by 20% at all ages (which would represent over 100,000 excess deaths in England & Wales), then the value of the scheme’s liabilities might fall by the order of 0.25%, all other things being equal. The impact for the group of members in receipt of a pension being bigger than that for the non-pensioners.

There has been some discussion about the extent to which those affected are more frail than average. The ONS has published separate research showing those living in more deprived areas, and those having more routine occupations, are disproportionately affected by Covid-19 (although more research is required to remove cofounding effects). Such groups have, on average, shorter life expectancies.

If we were to assume that, say, in 10 years’ time, the surviving members are the same whether there had been a pandemic or not, the financial impact could halve. This implies slightly lower average mortality over the following years offsetting the excess deaths in 2020.

The impact on each pension scheme will vary significantly, and depend on the actual circumstances of their individual members, such as their health, their personal circumstances, age and gender (which inevitably will be different to the general population assumed above).

Looking forwards

The above analysis focuses on the impact of an abnormal number of deaths in 2020 only.

Looking forwards, there is a lot of uncertainty on how Covid-19 will affect the population of the UK in the long-term. We don’t know who and how many individuals will ultimately be affected; how effective mitigation and vaccination measures will be; whether this is the first of several waves with future resurgences; and how resistant individuals will be in the long-term.

• If this is the first of a series of reoccurring pandemics which we do not become resistant to (either naturally or through vaccination), then mortality rates could be higher in the long-term.
• There are social and economic long-term uncertainties post pandemic, such as the impact on our health care system, the impact on public health from a significant deterioration to the economy, what the ‘new normal' might look like and how long it will last.

These factors could have far bigger consequences than the immediate impact of COVID-19 in 2020.

Finally, although COVID-19 is occupying the headlines at the moment, levels of mortality in the long term will also be driven by many other, perhaps more significant, factors. This includes developments in medical treatment and prevention, technology, lifestyle and the environment.