Op-Ed: We Need to Talk about Pensions

Matthew Bale from RiskFirst, a Moody’s Analytics company, takes an analytical look at the implications of COVID-19 for the UK pension industry.

One of the first lessons of the COVID-19 pandemic is that honesty and transparency matter. Let us state plainly that the virus disproportionately affects those of pensionable age. That instinctively makes it feel as if the pandemic will have a disproportionate effect on the pensions industry.

However, the second lesson of the pandemic is that instinct is not always helpful. Data, modeling, and effective risk assessment are proving their value as we respond to the virus and attempt to mitigate its effects over the longer-term.

In this spirit, RiskFirst has reviewed the potential impact of the pandemic on defined benefit pension plans. Underpinning our analysis is the information widely reported by various news sources. Although cases in the rest of the world now outnumber those in China, at the time of writing, China had the most extensive information on COVID-19 death rates.

The UK government has had pandemic planning in place for a number of years and published an update to its guidance back in 2013. In this guidance, the “most extreme scenario” assumes an additional 300,000 deaths in the UK, although this is considerably higher than the levels currently being projected.

To understand how pension plans would be affected by the current pandemic, we analyzed the impact of these increased levels of mortality on market-standard mortality tables. We found that, even if the extreme scenario plays out in the UK in 2020, we will only see a 1% reduction in liabilities. If a much less severe, but more persistent, level of infection feeds into long-term longevity trends, then the impact rises modestly to an overall reduction in liabilities of up to 2%.

When mortality assumptions are recalibrated each year, a 2% adjustment is not that unusual. These effects are well within the extreme scenarios established under Solvency II, and the framework for capital requirements it sets for insurance firms. The 1-in-200-year Solvency II shock is a permanent reduction to all mortality rates of 20. The corresponding opposite shock would be an increase in mortality rates of 20%, which translates to an increase of around 100,000 deaths in 2020, and every year after.

But of course, this is not yet the whole story. There are clearly other critical issues that flow from the COVID-19 pandemic. There has already been a significant shutdown of economic life in response to the pandemic. Although the UK government and the Bank of England, in line with governments and central banks around the world, have put together a series of emergency measures to stimulate economic activity and mitigate some of the worst effects of the shutdown, these measures are unlikely to prevent a downturn.

Pension plans rely on the support of their sponsoring employers. Many companies that do make it through are likely to struggle with paying contributions in the short- to medium-termand possibly longer. Since plans generally rely on sponsoring employers to fund pension deficits, this is one of the key red flags for the industry.

However, the biggest red flag of all is stock market movements around the world. Equities are down 25% since mid-February, having been down as much as 35% at times, increasing pension plans’ deficits further. Any rise in gilt yields, fueled by increased debt issuance to cover the UK rescue package, would be welcome relief for the pensions industry. Rising yields allow pension plans to reduce liabilities, but to date, more quantitative easing means that even this has failed to materialize.

In the end, the most important consideration for pension plans is not the mortality rateharrowing though that it is it is the instability in the stock markets. While individuals continue to follow health care advice to keep themselves, colleagues, partners, and clients safe, what will protect the pension plans as a whole is a package of successful measures that shore up the financial markets.


Matthew Bale is chief strategy officer at RiskFirst, a Moody’s Analytics company, where he is responsible for the strategic direction of RiskFirst and its proprietary risk management platform, PFaroe. In this role, Bale is focused on the expansion of RiskFirst’s analytics, both within the pensions industry and into other financial markets.

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