XPS research shows pension liabilities in UK company accounts could be overestimated by up to £60bn

UK companies could be overestimating their pension liabilities by up to £60bn in their company accounts due to the coronavirus pandemic, according to research from XPS.

Covid-19 has had an impact on life expectancy, most visibly in terms of deaths caused directly by the virus. However, the pandemic’s wider economic and healthcare impact will also have an impact on life expectancy, which will have the effect of reducing companies’ pension liabilities.

Research generated by the XPS Covid-19 tracker has found that life expectancy of pension scheme members will be lower than assumed by companies last year. This will reduce the cost of pension promises by 1.5% to 3.5%, depending on the membership of a scheme. Across all UK DB pension schemes, this would mean a £25bn to £60bn in the cost of pensions measured on an accounting basis.

Accounting standards require companies to use best estimate assumptions to determine the value placed on defined benefit pensions promises. The Financial Reporting Council has given particular scrutiny to mortality assumptions, as these can vary significantly between schemes.

Simon Reddish, head of accounting for pensions at XPS Pensions Group, said “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”.

XPS has developed a scheme-specific approach to help companies asses the impacts of life-expectancy adjustments for their year- end accounts. This is done by carrying out scheme-specific member analytics to show how each scheme is exposed to the key risk factors that drive the change in life expectancy due to Covid-19. This gives companies the information they need to make best estimate adjustments to mortality assumptions.

Steve Leake, head of demographics at XPS said “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.”