You may have seen recent headlines proclaiming that life expectancy in the US has declined by a year – a drop attributed by some to the coronavirus pandemic. Since defined benefit pension plans determine costs based on average life expectancies, plan sponsors are wondering if this will materially impact pension liabilities.
Longevity and liability
Life expectancy within a pension plan is often quite different than in the general population. Pension plan participants tend to have greater life expectancy than the US average, potentially because they have higher than average incomes – both as workers and in retirement. This could be due to higher pay and benefits associated with employers that sponsor pension plans, including healthcare benefits that can be critical to longevity.
Other plan demographics such as race, gender and socioeconomic status can also impact longevity. The one-year average reduction in population life expectancy varies significantly by group, from 0.7 years for non-Hispanic white females to 3 years for non-Hispanic black males.
Pension plan valuations typically update the census data every year. To the extent the primary COVID-19 impact is relatively short term, for 2020 through 2021 or 2022, that will be reflected in each year’s valuation data as emerging experience. We all hope that vaccination successes will make this a short-term situation that can be addressed mostly through the annual data process.
What our clients tell us
Anecdotal evidence from our clients indicates that the majority of plans have not seen a large spike in deaths among their plan participants. There are exceptions in some populations, such as first responders. Those plans’ best information on the short-term impact of COVID-19 will likely come from their own populations, not national statistics that do not reflect the appropriate specifics.
There is the potential for long-term ramifications that could affect projections of future mortality. However, at this time the broader long-term impact on health and longevity is mostly speculation. There are some cases of lingering health problems following COVID-19 infection, but there may also be some tendency for those who are not killed by the virus having greater longevity. Many virus-related deaths have been in part due to compromised pre-infection health status. Most pension plans and their actuaries will likely leave long-term mortality projections relatively unadjusted, unless or until we see significant evidence to the contrary.
Small ray of good news
All these factors imply that most pension valuations will not currently be materially impacted by COVID-19, outside of specific populations that are systematically at risk. This is not to downplay the real impact on a personal and organization scale: death, sickness, absenteeism, school closings, caregiving, and many other issues people continue to face during the pandemic. But when it comes to pension liabilities, sponsors can take a bit of comfort in knowing that overall pension plan health depends on many business and economic factors (such as plan investments), not just on participants’ life expectancy.