Long-term Covid uncertainty makes longevity hedging more valuable

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."

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• Topics
• Risk Reduction
• Prudential Financial
• Rohit Mathur
• buy-in
• buyout
• Longevity Risk
• Longevity swaps
• Longevity