Aon has warned pension schemes against over-reacting to short-term mortality data, in light of the Covid-19 pandemic.
It warns schemes not to be unduly influenced by high short-term mortality data in he UK when setting their longer-term mortality assumptions.
Tim Gordon, partner and head of demographic horizons in Aon’s Risk Settlement Group, says: “We’re emerging from the initial wave of thsi global 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.”
Gordon adds: “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.
“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, adds:“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.”
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