Long-term Covid uncertainty makes longevity hedging more valuable

James Phillips
clock • 2 min read

The uncertainty surrounding the potential impact of so-called long Covid and behavioural changes heightens the need for schemes to increase their longevity hedging, says Prudential Financial.

While most schemes will have seen a limited change in liabilities directly due to the mortality effects of the pandemic, the longer-term consequences of the pandemic on younger generations is unclear.

Fatalities due to the disease have largely affected the most elderly parts of the population or those with existing co-morbidities, with the illness mostly sparking a reduction in liabilities if any.

Prudential Financial head of international transactions for international reinsurance Rohit Mathur explained: "Pension liabilities were not significantly impacted by the pandemic. The most impacted populations already had high mortality rates or were people with significant underlying health conditions. These groups make up a relatively small proportion of pension liabilities."

However, competing and uncertain forces will come into play as the world emerges from the pandemic.

As set out in a paper co-written last year by Prudential Retirement senior vice-president and head of international reinsurance Amy Kessler, the impact of long Covid, delayed diagnoses and postponed medical treatment will wrangle with healthier lifestyles, greater hygiene, and medical advances to either push up or pull down average longevity improvements.

Mathur said this uncertainty made it more important for schemes to be considering reducing the longevity risk in their schemes, noting it was "too early to quantify" the impact.

"The long-term impact of this pandemic is unclear," he said. "The risk is heightened. There is more uncertainty on the path that future longevity improvements can take. Each time there is greater uncertainty, hedging is more valuable - either through longevity swaps or pension risk transfer."

He added: "I am optimistic that we will see a continued desire from pension schemes to mitigate that risk and to transfer that risk where appropriate."

Prudential Financial anticipated similar levels of buy-ins and buyouts for UK pension schemes in 2021 as last year, which are expected to be confirmed at around £30bn, subdued from the £44bn recorded in 2019, albeit largely due to the number of megadeals.

Mathur concluded: "We believe that the market for de-risking is strong and remains strong this year. Volumes are expected to be comparable to last year, both in the buy-in and buyout market, as well as the scheme direct [longevity swap] market, which is episodic enough that it is unpredictable, but the headline is the overall market is strong."

James Phillips
Author spotlight

James Phillips

Professional Pensions journalist from 2016-2022

More on Risk Reduction

Pharmacists look to appeal over Boots Pension Scheme buy-in complaints

Pharmacists look to appeal over Boots Pension Scheme buy-in complaints

PDA Union says it will exhaust internal dispute processes before taking case to Ombudsman

Jonathan Stapleton
clock 12 June 2024 • 2 min read
Medical Protection Society pens £125m buy-in deal with Rothesay

Medical Protection Society pens £125m buy-in deal with Rothesay

The full buy-in secures the benefits of all 618 scheme members

Holly Roach
clock 11 June 2024 • 2 min read
Two unnamed schemes complete £85m buy-in with Canada Life

Two unnamed schemes complete £85m buy-in with Canada Life

Risk reduction transaction secures benefits for 189 pensioners and 87 deferred members

Martin Richmond
clock 04 June 2024 • 2 min read
Trustpilot