How to project trends in mortality after Covid-19: the CMI consultation
On 21 September the Continuous Mortality Investigation (CMI) published a consultation on a modification to its mortality projections model to allow for the effect of the Covid-19 pandemic. All sounds very technical, so what does it mean for Defined Benefit (DB) pension schemes?
DB pension schemes in the UK use the CMI model to make assumptions about how life expectancy will change in the future. This affects all aspects of pension scheme funding, including funding valuations, company accounting disclosures and transfer values for members. A change to the model could mean deficits growing or shrinking, and good or bad news for members transferring their pension to another scheme. Understanding how the model may change is key for trustees and sponsors to anticipate upcoming shocks to their scheme’s financial position.
Important choices for DB schemes
The CMI model is deliberately flexible. Schemes can choose how to pull the levers in the model to reflect their view on future life expectancy. This means the impact of the release of a new model isn’t “one-size-fits-all”. Instead trustees and sponsors (and their actuaries) need to look at emerging mortality data and any information they have on the likely longevity of their members, to work out how to pull the levers.
In their consultation, the CMI are proposing the introduction of a new lever to pull, which is all about Covid-19.
Why Covid-19 requires a new lever
The CMI model uses data on trends in historical deaths to project how deaths in the future may pan out, under the assumption that the recent past is a good guide to the near future. This is illustrated in the following chart. The dots in the chart show actual mortality improvements, averaged over five years and the lines show fitted improvements from the model, which smooth out the dots and blend into the future improvements.
However, the Covid-19 pandemic has led to deaths in the UK that are so extremely abnormal that this has called into question whether using the recent past as a guide still makes sense. At the time of writing (October 2020), there have been about 60,000 more deaths in 2020 in the UK than what would have been expected based on deaths in 2019. This is equivalent to a worsening of mortality rates by 10.4%. The CMI model, in normal years, would say that an increasing trend in deaths means that this trend will probably continue for a few years. However, this isn’t a normal year and the recent dramatic spike in deaths is (we all hope) a one-off event, and not a step change in trend that will continue to play out in similar fashion for many years to come.
So a change to the model is needed. The CMI are proposing to add a new lever to the model so users will be able to adjust how much weight is placed on the 2020 data.
The impact of varying the weight parameter is shown in the following charts, taken from CMI Working Paper 137. The vertical axis shows the impact on life expectancy, for the different values of the weight parameter on the horizontal axis. The different colour lines show what the impact might look like depending on how the mortality data emerges over the remainder of 2020. At the time of writing the 2020 data is in line with the yellow “-10% improvement” line. If that is the case for the whole of 2020, then giving full 100% weight to data for 2020 would lead to life expectancy falling by over 4% for males.
Of course, the future of Covid-19 remains highly uncertain. Even in normal years, making assumptions about future mortality is challenging, but Covid-19 has made even the near future very unpredictable. But DB schemes must set these assumptions, and so a key question will be how far to pull the new lever.