The COVID-19 pandemic has made estimating pension scheme member mortality more difficult than ever. To add to the mix, the actuarial profession recently released this year’s iteration of its annual mortality improvement projection model which predicts life expectancy for retirees around half a year shorter than last year’s model. In this mini-series, we look at why the change has happened and how pension scheme trustees and corporates can manage it.
COVID-19 has sadly led to thousands of deaths in the UK, from the start of the pandemic until now. The actuarial profession estimates there to have been 200,000 more deaths than would otherwise have been expected up to 7 July 2023. For pension scheme trustees and sponsors, this has made the process of updating member longevity assumptions difficult:
Due to the uncertainty, many pension schemes would not have significantly changed their life expectancy assumptions since 2020.
In answer to the first of the questions above, mortality in the UK has not yet returned to pre-pandemic norms, instead continuing to run at a high level throughout 2022 and into 2023. COVID-19 remains responsible for hundreds of deaths each week in a fairly regular pattern (i.e. without the spikes of the pandemic). There is also a similar number of above-average deaths from non-COVID-19 causes, including circulatory disease. Figure 1 shows how COVID-19 and non-COVID-19 deaths have compared to average to illustrate this.
After treating 2020 and 2021 as exceptional, the Continuous Mortality Investigation (CMI) has concluded that last year’s heavy mortality is more relevant to what we might see in future for pension scheme members – a view which has since been supported by the Pensions Regulator in its 2023 Annual Funding Statement. The CMI has therefore included 2022 data in the calibration of the 2022 mortality projection model but has applied a 25% weighting so as not to place full reliance on it (2020 and 2021 data continues to be excluded). If it had fully incorporated the 2022 data, life expectancies at 65 would have reduced by around 11 months compared with last year’s model. The decision to apply a 25% weight means that the CMI does not believe that 2022 experience in isolation provides sufficient evidence to reflect a new normal with life expectancies that are about a year lower than pre-pandemic expectations. Instead, their core projections allow for a more modest reduction in lifespan for pension scheme members – a reduction in life expectancy by six to seven months at age 65.
The latest reduction in life expectancy implied by the new model continues a trend seen over the last decade. Stalling longevity improvements in the UK from a variety of causes has seen pension scheme member life expectancy drop by around two years in total, relative to the 2012 model. Overall, CMI data published in 2023 gives the lowest projected lifespans since the first version of the model was developed in 2009 – see figure 2.
Whether, and how quickly, mortality rates return to pre-pandemic levels is a topic of much debate, no doubt leading to many difficult assumption setting discussions around pension trustee and corporate board tables. However, it should be noted that the CMI improvement model merely recognises the developing data to the end of 2022 and implicitly includes an element of ‘mean reversion’ – i.e. that past periods of strong improvements will occur again at some point in the future. Should the emerging trend of heavier mortality continue, life expectancy as predicted by the CMI’s model will continue to fall. Cue even more discussions in the years to come.
Read the next part of this mini-series: How UK pension schemes can set mortality assumptions in the current environment.
