We have been bombarded daily with the grim count of COVID cases, hospitalizations, and loss of life for over a year. The sheer number of deaths is difficult to comprehend. In February, the National Center for Health Statistics framed the tragedy in a different context when they published a report that said in the first half of 2020, the U.S. life expectancy declined by one year.
With all of this going on, pension plan sponsors are rightly asking what impact COVID-19 might have on their plans: Will pension plans see a big decline in payments going forward due to the impact of the pandemic over the last year or so? Will the decline in life expectancy, reported by the NCHS, reduce the expected future payments from plans?
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The answer to both questions is most likely no. Here’s why:
To understand the answer to the first question you need to look at the numbers. While 700,000 deaths is tragic and unfathomable, on a U.S. population of approximately 330 million it amounts to a mortality rate of just 0.2%. The mortality rate does rise to about 1.1% when we take into account only the population over age 65, which, according to the Centers for Disease Control and Prevention, has accounted for 80% of the COVID mortality.
An additional mortality rate of 1.1% on pension retirees over age 65 is significant. However, there are many reasons to believe that, for corporate pension plans, the impact on plan liabilities will be less. Here’s what the rough numbers tell us:
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- Pension liability is spread across all participants and on average, pension retirees account for about half of the total. Therefore, the 1.1% mortality rate becomes about 0.5% on a plan’s liability.
- COVID mortality rates have been heavily weighted towards older adults. For example, there have been more deaths among those over age 85 than there have been among those aged 75 to 84. Because older participants carry less liability, due to shorter life expectancy and generally lower benefit amounts, the 0.5% impact drops to maybe 0.4%.
- Pension plans are required to provide death benefits equal to at least 50% of the participant’s benefit payable to the surviving spouse, unless a benefit without survivor protection is elected at retirement, with the appropriate waiver. This probably cuts our 0.4% to about 0.3%.
- Mortality rates for corporate pension plan participants are generally better than the overall U.S. population. This is because, relative to the general U.S. population, these participants tend to be higher earners, have a higher level of education and have better access to healthcare. COVID deaths have unfortunately disproportionately impacted the poor and other populations less common in corporate pension plans.
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Most pension plans experience regular demographic and economic gains and losses each year that are much more significant than the additional impact of COVID-19 mortality illustrated above. Of course, every plan is different and your plan could experience different results.
Finally, in our experience, most corporate pension plans examined the impact of COVID when preparing 2020 fiscal year-end liabilities and were pleased to find very little impact. In fact, in a flash survey of over 100 plans we found that none were impacted by COVID mortality enough to call for a change in normal year-end procedures.
On the second question regarding the one-year decline in life expectancy reported by the National Center for Health Statistics, it is important to understand the report’s actual calculations. While the national headlines reported the one-year decline in life expectancy, the calculation assumed that the higher mortality rates due to COVID-19 experienced during the first half of 2020 repeated in every year, at every age, going forward.
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There are good reasons why this is used as a simplified representation of the magnitude of the impact, but it certainly does not mean that COVID-19 will shorten our expected lifetimes by one year as the headlines suggest.
In fact, looking ahead, there are many arguments that the overall changes brought about by the pandemic could serve to improve future lifespans. Factors include:
- The availability of very effective vaccines
- Collateral discoveries applicable to broader health issues
- Improved hygiene
- Immunity of survivors
- Reduced air pollution
- Changes in long term care facilities
- Health policy changes
- Greater focus on health
Projecting future mortality rates is a fluid process based on ever-evolving assumptions of future mortality improvement. Yes, improvement. The expectation is that human lifespans will continue to increase, as they have over the past decades. Whereas the amount of the improvement is hotly debated in actuarial circles, the fact that there will be improvement is not up for debate.
