Aon warns pensions not to over-react to Covid-19 mortality spike

Insurance and reinsurance broker and consultancy Aon has warned UK pension schemes not to over-react to the recent short-term spike in mortality rates in the country, as the impact to longevity risk assumptions may not be as significant as it seems.

Aon’s Risk Settlement Group, which deals with pension risk transfer, including the buy-in and buy-out side as well as longevity reinsurance and longevity swaps, says that overall the longevity markets are continuing to function effectively despite the impacts of COVID-19.

Of course, the Covid-19 coronavirus pandemic has caused a significant spike in excess mortality rates in almost every country affected. In the United Kingdom the increase in excess mortality as a result of the pandemic has been among the highest, with the country perhaps the hardest hit.

Aon does not believe this warrants any significant changes in assumption over the forward-mortality rate at this time, though.

Instead, the broker cautioned UK pension schemes against over-reacting to the elevated short-term mortality data when it comes to setting their long-term mortality assumptions.

Tim Gordon, partner and head of Demographic Horizons in Aon’s Risk Settlement Group, explained, “We’re emerging from the initial wave of the global COVID-19 pandemic with no effective vaccine and with some critical aspects still unknown. Some people may therefore assume that life expectancy must have reduced, but this is not necessarily the case.

“While there are potential outcomes of this crisis that could reduce life expectancy, including the possible impact of economic recession, there are also potential outcomes that could result in higher life expectancy. These could include increased spending on health and social care, and a potential hardening of the UK to future pandemics.”

Pension schemes look closely at mortality rate data, modeling and indications to help in setting their assumptions related to longevity risk exposure and also funding needs.

Decisions related to entering into pension risk transfer are made on these basis’, while longevity exposure drives the need for hedging and de-risking solutions to reduce exposure to pensioners living longer than anticipated.

So, with excess mortality rates having spiked due to the Covid-19 pandemic, pensions may be thinking they can reduce their longevity assumption and expect to offset longevity de-risking decisions, but this isn’t necessarily the case.

Gordon continued, “On top of this, the socio-economic profile of pension schemes means that their liabilities are typically partially insulated from the variations we see in national mortality statistics. Accordingly, it would be premature now to make major changes to best estimate longevity assumptions in either direction. Indeed, it is reasonable for median best estimate assumptions to remain broadly unchanged.”

Martin Bird, senior partner and head of Aon’s Risk Settlement Group, added, “Longevity markets have continued to function efficiently over the course of the crisis to date, with bulk annuities and longevity swap transactions continuing apace. Trustees and sponsors have, in our experience, taken the view that risk settlement forms part of their long-term risk management strategy and have been comfortable with proceeding with transactions, despite the turbulence from COVID-19. In fact, in some cases, agile clients have been able to take advantage of pricing opportunities, such as those arising from increased credit spreads earlier in the crisis.

“More than ever, it is important for schemes to keep their wits about them when entering a potential transaction. Particular features in the current environment are the need to understand the consequences of different on-risk dates – and the potential for regret risk – as well as ensuring that investment portfolios are adequately stress-tested to guard against any later liquidity problems.”

Reinsurance markets remain open for longevity risk transfer and pension de-risking business at this time, with this area of the market well-capitalised still and likely to continue to be for the foreseeable future.

However, the capital markets still remains ready to assist to a degree and there continues to be appetite for longevity exposure in some life ILS fund strategies.

Read about many historical longevity swap and reinsurance transactions in our Longevity Risk Transfer Deal Directory.