Grim COVID-19 Scenario Could Cut Pension Liabilities

Pension plan lifespan forecasters say the COVID-19 pandemic could pinch U.S. pension plan forecasters, by leading to enough improvements in public health to make retired workers live longer.

The pandemic could also slash pension plan sponsors’ liabilities, by making ordinary health care an expensive luxury — and driving up the U.S. death rate for decades to come.

Analysts at Club Vita US LLC have presented those scenarios in a look at the possible effects of the COVID-19 pandemic on three types of U.S. pension plans: defined benefit plans sponsored by single employers; defined benefit plans sponsored by multiple private-sector employers; and defined benefit plans sponsored by government employers.

The analysts’ work reflects the same kinds of effects that might affect blocks of life insurance policies, blocks of annuities, and life settlement portfolios.

The Methods

Analysts at the Hoboken, New Jersey-based branch of Club Vita started with U.S. Centers for Disease Control and Prevention (CDC) data showing that COVID-19 might have increased the actual number of U.S. deaths by about 14.8% over the expected levels in 2020.

The analysts then came up with four possible pandemic scenarios:

1. A brief increase in death counts, with no noticeable lasting positive or negative effects on how long pension plan participants live.
2. A long, slow climb back to normal economic growth and a normal rate of improvement in how long pension plan participants live.
3. A period in which U.S. society recovers quickly from the pandemic and works hard to get everyone access to decent health care, to reduce the effects of poverty, race, lack of health insurance and other factors on how long people live.
4. A world in which dangerous COVID-19 variants, failed vaccination campaigns and failed public efforts lead to COVID-19 increasing U.S. mortality rates throughout the 2020s and damaging the U.S. health care system.

The Predictions

The analysts found that, in the sunniest scenario, in which COVID-19 spurs the United States to reduce differences between the health care haves and have-nots, improving health could increase retired workers’ lifespans.

That increase could add 0.6% to multiemployer plans’ pension plan obligations, 1.1% to government employers’ obligations and 1.3% to single-employer plans’ obligations.

U.S. defined benefit pension plans of all kinds have promised participants about $16 trillion in benefits, according to the Federal Reserve Bank of St. Louis.

If public health improvements increased $16 trillion in pension plan obligations by about 1%, that would translate into a $160 billion increase in obligations.

In the gloomiest scenario, in which COVID-19 ruins the U.S. health care system, rising worker death rates could cut obligations by 3.6% at multiemployer plans, 4.4% at government employer plans and 4.6% at single-employer plans.

If COVID-19 and health care system deterioration increased worker and retiree mortality enough to reduce overall pension obligations by 3.6%, that would decrease plans’ pension obligations by about $576 billion.

Other Factors

The analysts note that overall pension plan health will depend on how well private and public employers are doing, and how well plan investments are doing, not just on the plan participants’ longevity.

“Any damage to the world economy is likely to affect investment returns, bond yields and rates of inflation, with knock-on effects for liability calculations,” the analysts write.