Measuring Mortality

Impact of COVID-19 On Pension Plan Actuarial Experience And Assumptions, Including Mortality

Effects on the economy, workforce patterns & plan budgets are significant

Excerpts from a new Issue Brief from the American Academy of Actuaries, which suggest implications for assumptions and underlying data. Access the full report here.

COVID-19 is responsible for over 200,000 deaths in the U.S. as of the date of publication of this issue brief, according to Johns Hopkins University School of Medicine. While these deaths have been concentrated more heavily among those over age 65 so far, there have been deaths in all age groups particularly for those who also have underlying health issues. Significant race gaps exist, with death rates disproportionately higher for Black and Latino/Hispanic populations in all age categories.

As of the end of August, COVID-19 restrictions have caused some to delay needed medical care for other health conditions. There is also concern that “deaths of despair” are increasing during this period. The situation is evolving as some areas of the country are still seeing surges in cases as well as the steadily rising nationwide increase in deaths, and there is concern that this first wave of the pandemic will continue during the rest of 2020. Despite promising developments, the timing and widespread availability of a vaccine is still unknown at this time, and there is uncertainty about how effective it will be and how widely it will be utilized initially.

During this challenging time, pension actuaries are being asked about the effects of COVID-19 on pension plans. It is understandable that many of these questions focus on mortality and the potential reduction in pension costs. However, actuaries also would consider the impacts of the pandemic on all the assumptions and underlying data used to value pension plans. The effects of the pandemic on the economy, on employment patterns, and on plan sponsors’ budgets are likely to be far more financially significant to most pension plans, at least in the near term, than the effect on mortality.

Observed Mortality And Assumed Future Mortality

With regard to mortality, there are two primary areas of potential effect—observed mortality and assumed future mortality. This paper discusses both these components of a mortality assumption. Observed mortality includes excess deaths—defined as the number of deaths above and beyond what would have been expected under normal circumstances. Excess mortality is thus mortality that is attributable to crisis conditions rather than just those deaths that have been officially linked to COVID-19.

Observed Mortality

For many companies with calendar-year fiscal years, year-end accounting measurements typically do not reflect full plan participant status updates, due to timing considerations. Actuaries and plan sponsors are faced with determining whether excess mortality during 2020 is significant enough to warrant accelerating the participant census update or otherwise reflecting in year-end measurements. However, the level of excess mortality to date and the expected advanced ages at which most of the excess deaths occur would appear unlikely to have a significant impact on the liabilities for most plans.

For example, few if any plans are likely to see a doubling of normal annual mortality rates due to the pandemic, and yet even a doubling of the one-year mortality rate is unlikely to reduce benefit obligations by much more than 1% for the typical plan. If mortality increases late in the year, this effect might not be seen until the following census update due to time lags in reporting processes.

For many corporate and multi-employer pension plans and some public plans, the next measurement date will be the end of this calendar year, by which time much of the immediate effect of the pandemic during 2020 on the plan may be known. Information about actual deaths in 2020 will be reflected in the next update of participant data (i.e., January 1, 2021) and no special action on the part of the actuary would be required to incorporate this information. (Participants’ compromised health status due to COVID-19 or to their delay of other medical care in the aftermath of the onset of the pandemic will not be known at this time, but could lead to future increases in mortality.)

Where an actuary uses an approach that differentiates among different population subgroups (e.g., by reflecting blue-collar/white-collar, varying mortality by benefit/ income level, or more refined variations on this approach, such as utilizing participants’ ZIP codes) then data updates alone will change the composition of the participant population and automatically give rise to some change in overall mortality expectations going forward which may or may not be significant. For most plans, it is believed that this effect is likely to be relatively small, but plans with employee groups particularly exposed to COVID-19—such as those that cover essential workers who cannot work remotely— may see an elevated impact in portions of their population.

Assumed Future Mortality

The effects of the pandemic on the economy, on employment patterns, and on plan sponsors’ budgets are likely to be far more financially significant to most pension plans, at least in the near term, than the effect on mortality...

The mortality assumption generally consists of a current “base” rate of mortality, as well as a projection of future changes—typically reductions (or “improvements”) in the rate of mortality. If actuaries responsible for developing these assumptions were to follow their normal processes, it would take a number of years for the effects of COVID-19 to have any impact at all on assumed future mortality for most plans. Over time, the increase in mortality would be reflected in observations and would carry through to future projected rates of improvement and to the next generation of base mortality tables or to plan-/population-specific tables based on the experience of those populations.

However, the question of whether it is appropriate simply to carry the existing methodology forward when it comes to reflecting the impact of COVID-19 would be something to be If COVID-19 is a one-off (black swan) event with no long-term implications on mortality, then some might argue that the excess deaths resulting directly or indirectly from the pandemic would appropriately be excluded from any analysis for developing base mortality rates or future mortality improvement trends.

If COVID-19 is expected to have lingering effects, or a continuing acceleration of cases during the remainder of 2020 and into the 2021 plan year, then perhaps the actuary might reflect those aspects in the mortality assumption. However, the actuary might need more information to develop the rationale under which these adjustments should be made. Simply including excess mortality during 2020 (and perhaps 2021) with standard mortality and using these higher rates of mortality to develop base mortality rates or projected mortality improvements in the typical manner may not give the most appropriate answer.

COVID’s Lingering Effects

Some have suggested that COVID-19 will have lingering effects on health that will increase rates of mortality among those previously infected. This would mean higher rates of mortality will persist, although likely not at the same levels experienced during the pandemic. Additional information about the long-term health effects to develop such a premise would be needed. Where significant, these lingering health effects could also have an impact on both disability incidence and disability mortality assumptions.

Others have suggested that because COVID-19 and its secondary effects (such as avoiding non-COVID-19-related needed medical evaluation and procedures) disproportionately impacts those who are already in poor health, the excess deaths that have occurred thus far are concentrated among those who were most likely to die in the near term in the absence of the pandemic (accelerating into a shorter period experience that would have happened over a slightly longer time frame).

The remaining population will be comprised of fewer of these individuals than would have previously been the case and thus lower rates of mortality might be seen in the upcoming years (after reflecting a short-term increase). Again, more scientific data would be needed to validate such a presumption and whether it would be offset by the “lingering effects” data. Analyzing the distribution of deaths and how these are related to factors associated with higher mortality (such as lower benefit/income levels) may start to answer this question.

Lessons Learned

Along similar lines, some have suggested that habits developed during the current pandemic, such as more diligent hand-washing and mask-wearing, may serve to slow the spread of other diseases that currently exist as well as new diseases in the future, thereby lowering future rates of mortality. On the other hand, pandemics could become more common in the future. If so, it remains to be seen how the lessons learned during this pandemic will be applied to limit future spikes in mortality.

Until there is more information, actuaries might not be able to assess which of these viewpoints are most relevant or whether the effects are significant enough to merit reflecting. In the absence of any such information, many actuaries might conclude that the most supportable course of action is to reflect updated data but otherwise continue to use the same assumptions for future mortality improvement that have been in use. It is possible that actuaries for plans that disproportionately cover essential workers on the front lines, such as first-responders or grocery store workers, might reach different conclusions.

Read the full report here.