UK defined benefit (DB) pension schemes could be overestimating their liabilities by as much as £60bn in their company accounts as a result of changes in life expectancy amid the pandemic, research from XPS Pensions has found.

The firm explained that whilst Covid-19 has had a very visible effect in terms of deaths caused by the virus, the wider economic and healthcare impact of the pandemic will also impact life expectancy, and in turn, reduce companies’ pension liabilities.

In particular, data from the XPS Covid-19 tracker has found that life expectancy of pension scheme members will be lower than assumed by companies last year, reducing the cost of pension liabilities by 1.5 per cent to 3.5 per cent, depending on membership.

The firm emphasised that, across the broader UK DB pension landscape, this could equate to an overestimation of between £25bn to £60bn in the cost of pensions measured on an accounting basis.

XPS head of accounting for pensions, Simon Reddish, stated: “Our analysis shows that the Covid-19 pandemic is expected to sadly have a negative impact on the life expectancy of pension scheme members and companies should take this into account in corporate reporting.

“This will ensure that mortality assumptions remain best estimate, and avoid overstating pension obligations.

"Schemes must consider the impact of the pandemic on their portfolios in the round, and that means taking into account the impact of the pandemic on life expectancy as well as on financial assumptions”.

The firm has also announced that it has developed a scheme-specific approach to help companies assess the impacts of life-expectancy adjustments for their year-end accounts.

This is done via scheme-specific member analytics, which show how each scheme is exposed to the key risk factors driving change in life expectancy amid the pandemic, and gives companies the information needed to make best estimate judgements.

XPS head of demographics, Steve Leake, added: “We have spent the last six months tracking the development of the virus to get an in depth understanding of the impact on pension schemes, both now and over the next few years.

“This has put us in an ideal position to combine our research with our market leading member analytics to enable clients to better understand the potential impact on their own scheme.”

The analysis also follows research from PwC, which found that a revised regulatory approach to how DB schemes fund could allow for "significant investment" in the job market to boost the economy post-Covid, and could provide around 150,000 new jobs for the next decade.

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