While in the short-term savers and investors are taking an economic hit through stock market volatility and low interest rates, there’s mixed news from pension specialists XPS, who are forecasting “long-term vulnerabilities in pension schemes following the pandemic” – as well as a potential £90bn reduction in the funds’ liabilities and a boost to annuity rates.
XPS’s findings come from combining traditional actuarial methods and modern data science techniques which have presented a series of potential outcomes, depending on how the virus continues to spread in the months and years ahead – including the longer-term effect on the health of those who survive it.
One major impact in some of their long-term scenarios is that the economic effect of COVID-19 on life expectancy could be 50% higher than the short-term impact of the pandemic, adding up to a reduction of a year of average life expectancy. Life expectancy rates had already begun to stall before this year after decades of improvements.
This shift, they say, could cause a reduction in liabilities by as much as 5% across the DB universe, which would mean pension funds having to pay out up to £90bn less in defined pensions in the years ahead.
Any reduction in life expectancy could also provide a boost to annuity rates which are currently at an all-time low, as insurers could see £8bn taken off their liabilities.
Against this, there is a warning about the economic impact on schemes’ assets – especially, they say, for those schemes holding growth assets and/or with low hedging ratios. Stock market volatility continues around the globe, although central bank interventions are helping to maintain a level of confidence.
As at the end of July, the FTSE has risen over 20 per cent since its March low but was still 1300 points down from the start of the year and lagging behind most other stock markets – with concerns about its weighting towards the banking sector which is struggling with low interest rates and the possibility of bad debts.
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