With pensions funds assuming lower life expectancies than they did prior to the pandemic liabilities have reduced leading to better funding positions of UK defined benefit (DB) pension funds accelerating their shift towards de-risking.
Mortality analysis from the start of the coronavirus pandemic until the end of 2022 showed that England and Wales had an excess mortality rate of 26% at the end of 2022.
The Continuous Mortality Investigation (CMI), which carries out research into mortality on behalf of the Institute and Faculty of Actuaries (IFoA), recently analysed mortality in 24 international territories.
The mortality rate for England and Wales was the third highest of the 12 western European and Nordic territories and ninth highest of all territories analysed.
Of all territories analysed, Bulgaria had the highest cumulative excess mortality at the end of 2022 (65%). Poland had the second highest (46%) and the US the third highest (45%).
Of all territories with data to the end of 2022, New Zealand had the lowest cumulative excess mortality (-4%). Australia had the second lowest (1%) and Norway the third lowest (3%).
According to Cobus Daneel, chair of the CMI mortality projections committee, while the excess deaths or future mortality expectations “don’t generally” affect pension funds’ investment strategies, there could be an indirect effect where liability-driven investments (LDI) are used.
He added that if pension funds believe that pensioners “will die sooner” than they did in the past then that will mean that either in total they expect to pay out less in pensions or that on average they’ll pay off those liabilities sooner.
“This means that any investment strategy that relies on matching these expected outflows may need to be adjusted to take account of changing views on life expectancy,” he said.
As most pension funds now assume lower life expectancies than they did prior to the pandemic, Daneel said that liabilities have reduced.
“Rather than prompting a shift to riskier assets, better funding positions could accelerate the shift towards further de-risking and eventual buy-out,” he added.
According to Steve Caine, director of retirement at WTW, pension scheme asset allocations are affected by a “range” or factors including but not limited to how well funded they are, with well-funded schemes less likely to take investment risks.
Caine said: “The elevated level of mortality in the UK over recent years is leading to most defined benefit schemes reducing their expectations for how long their members will live for. This in turn is reducing their assessment of the liabilities they need to pay in future which has led to small but noticeable improvements in funding levels.”
He noted that for some schemes, this may have put them further along their funding path which may bring forward the opportunity to de-risk investment allocations.
He also pointed out that this can be through using lower risk assets, for example bonds in place of equities, or buy purchasing annuity contracts with insurers.
Changes in life expectancy also have other implications for pension schemes, Caine added, including changing the shape of future cashflows a pension scheme is expected to pay.
He said: “For those schemes with cashflow matched or LDI investments, these investments may need to be adjusted.”
Alastair Walker, UK head of longevity analytics at Mercer, added that the boost in funding positions may provide “greater flexibility” around investment strategy when looked at in isolation, “for example, through greater risk margins if funding levels are higher, or some scope to de-risk if desired”.
He added that the “excess deaths have been largely driven by a pandemic that has also impacted many economic factors that would have directly influenced liability values and investment markets, and most investment stances are unlikely to have changed due to longevity expectations in isolation”.
Walker also pointed out that while the comparison to the UK of other countries’ mortality experience is “interesting”, as almost all UK DB scheme members will tend to live in the UK, overseas mortality rates are of “no significant direct consequence” to the funding positions or investment allocation of typical UK DB schemes.
He added that for the typical DB schemes the impact on funding levels will be driven by mortality experiences being heavier over 2020-2022 resulting in improved funding levels and generally future expectations of longevity falling.
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