COVID-19 longevity scenarios: a bump in the road or a catalyst for change?

When thinking about pension plan finances, the isolated impact of 2020 excess mortality will be small. This is because we only expect a very small fraction of pension plan participants to die each year, so even increasing this number by 10% or more leads to only a modest change to future cashflows. What is more important are the potential knock-on effects of COVID-19 on future improvements in life expectancy in 2021 and beyond, with both positive and negative effects.

To understand the risk associated with these competing effects, we turn to scenario analysis, a cornerstone of risk management used both to explore extreme risk and to understand an acceptable range of best estimate assumptions.

In this paper we present four longevity scenarios that pension plans can use to help understand the increased longevity risk introduced by the pandemic and to stress test their funding strategies.