Too soon to tell COVID's impact on long-term retirement trends

The COVID-19 has had a significant impact on current mortality rates, but the effect on retirement plans may not be felt for a while, Milliman said in a recent analysis.

“For now, the impact of the pandemic may be most clearly seen, not in changes to plan participants’ mortality, nor in annuity prices, but rather in participants’ choices regarding their benefits, such as the election of lump sums over annuities,” the risk management firm said.

A team of actuaries at Milliman warned, “Though one near-term effect of the pandemic was a significant increase in mortality, a consensus has not yet developed among leading institutions as to the long-term impact on mortality trends.”

Between March 22, 2020 and December 26, 2020, total deaths were 21.1 higher than expected in the U.S., Milliman said. Of that increase, about 80% may be attributed to the coronavirus. In its analysis, the company said that because membership in a pension plan generally is associated with a higher socioeconomic status, those people have had higher rates of mortality rate improvement than the general public.

But Milliman noted that mortality rates are not frequently updated, noting that the impact of COVID-19 will be reflected in funding valuations starting in 2024, at the earliest. And since prescribed mortality assumptions are revised at least every ten years, it is possible that any update in base mortality trends will not be effective until 2028.

“By that time, lasting effects of the pandemic are likely to be better understood and measurable,” Milliman noted. “Thus, if it is determined that there is no long-term impact to mortality, then funding valuation results may never reflect experience during the pandemic.” Prescribed lump sum assumptions also lag, the researchers said, adding that any impact of the pandemic may never directly affect lump sum distribution amounts. Instead, due to uncertainties, participants may be more willing to accept a lump sum distribution rather than take a gamble and receive benefits through an annuity.

“Plan sponsors and practitioners should pay close attention to recent decisions made by plan participants and determine whether they are indicative of lasting trends,” Milliman said. “Such behavior may also inform plan sponsors who are thinking about offering lump sum windows to participants not currently afforded the option of taking a full cash distribution.”

Milliman added, “At present, it is recommended that plan sponsors continue to select the base mortality rates most appropriate to their plan populations.”

Still, Milliman warns that plan sponsors and practitioners may face more scrutiny this year and likely will be required to justify their assumptions.

However, the mortality assumption used for pension plan liabilities are prescribed by the IRS and have little flexibility.

“Consequently, unless there is a change to the current release structure, any recent trends or experience from the pandemic are not likely to flow through these results for some time, if at all,” Milliman said.

Mortality rates used in determining lump sum distributions also are determined by the IRS. The valuation for liabilities for defined benefit plans in accordance with Financial Accounting Standards Board requires assumptions based on a plan’s sponsor’s best estimates of future events. Those assumptions, including mortality, are used in determining a plan’s benefit expense and funded status and are disclosed in financial statements.

Milliman said that a greater concern for annuity providers is the current condition of financial markets. “High volatility, a low interest-rate environment, and uncertainty about the ongoing effects of the pandemic have combined to create uncertainty about investment returns, liquidity, and earnings,” Milliman said.