A rise in excess deaths in Britain caused by Covid-19 will lower the state pension burden by £1.5 ($2.09bn), with private pension providers and insurers also affected by the higher mortality rate.
The Treasury’s pensioner spending will fall by £600m in 2020/21 and £900m in 2021/22, according to the Office for Budget Responsibility, because the 144,000 deaths linked to Covid-19 since the start of the crisis were mainly comprised of people aged over 65.
Private pension providers may also see their burden fall, say analysts, while retirees buying annuities to fund their retirement may receive better terms going forward, and the government will receive a boost from a rise in inheritance tax receipts.
"The state pension of £134.25 per week adds up to just shy of £7,000 a year and sadly if people have died sooner than expected then that's £7,000 per year for each person that isn't being paid out by the government," Raj Mody, global head of retirement and pensions consultancy at professional services firm PwC, told The National.
“But [that extra revenue] will be dwarfed by the broader economic support the government has had to deploy. There is a financial impact [from Covid deaths] but this will not directly affect policy decisions in any material way; it’s just one of those consequences [of the crisis]. If you compare it to the significant economic dent and the loss of tax revenue from the lower economic activity because businesses are locked down, it’s almost lost.”
The pandemic has cost the British economy £407bn, including the extra £65bn of support measures pumped in by UK finance minister Rishi Sunak in his latest budget statement on Wednesday. This will help to prop up jobs and businesses as the country begins the slow process of easing itself out of tightened restrictions, thanks to a fall in the number of cases.
Sadly, the number of excess pensioner deaths for the 2020-21 fiscal year will hit 100,000, according to the OBR’s Economic and Fiscal Outlook report, an upward revision to its November forecast of 90,000 following the sharp increase in virus-related deaths over the past couple of months.
Matthew Edwards, a longevity expert at the Institute and Faculty of Actuaries, said Britain’s mortality rate for 2020 was 12 per cent higher than the previous year, with around 73,000 excess deaths.
"We saw the same thing back in the 1920s, at the time of the depression, so it's almost a one in a century sort of fluctuation," Mr Edwards told The National.
There have been about 37,000 more deaths than would be expected so far this year, said Mr Edwards, with more Covid-19 deaths to come.
“So, in a very approximate ‘round number’, we might expect the increase of 12 per cent in 2020 to be replaced by an increase of 5 per cent this year.”
However, with nine months of the year still to come, Mr Edwards said the figure was very uncertain.
As well as a reduction in pension payments for the state, private sector pension providers may also have fewer pay-outs to make because of the rise in deaths.
Mr Mody said people on final salary pension schemes tend to live longer because they are healthier and live in more affluent environments, therefore they will be less affected by Covid mortality.
“You have to be a bit reserved about how much of this effect actually hits private sector final salary schemes," he said.
Over the long term, the picture may be different, he said. Other health issues have been delayed, as hospitals were unable to treat patients due to the strain on the system from coronavirus. Meanwhile, the fundamental causes of death, such as heart disease, cancer, strokes and dementia have not changed.
“Mortality might be higher going forwards, because you've got all the current reasons for why people will die and then on top of that, you've got the endemic existence of another virus. So, that becomes a factor that could affect defined benefit pension schemes because it becomes part of the general trend of life and death," he said.
More than £130bn is tied up in UK defined benefit pension schemes due to previously projected life expectancy improvements, which have not yet materialised because of the crisis, PwC found in a recent report.
"Even if you cut that future improvement by a third, that’s about £45bn that could actually fund 150,000 jobs for the next decade, helping to boost the UK’s economic recovery after the pandemic," Mr Mody said.
Mr Edwards said the Covid deaths might "feel more tangible" for pension fund providers or insurers with large annuity portfolios, because "every extra death is as if there is one pensioner less to have to pay the pension for, or one annuity less".
However, the overall economic impact has tended to far outweigh the impact of the deaths themselves, he said.
“So if you’re looking at an insurer, there's been much more impact from the economic crash, the asset side of the balance sheet, than on the policy portfolio side," Mr Edwards said.
That has also been exacerbated by Covid deaths being disproportionate across the socio-economic spectrum, with far more blue-collar deaths than white-collar deaths.
"Pension firms and insurance portfolios tend to be much more on the on the white collar end of that spectrum," Mr Edwards said.
Becky O’Connor, head of pensions and savings at interactive investor, said the higher death rates will lead to annuity providers paying out less regular income to fewer pensioners. Annuities are a type of retirement income product that retirees buy with their pension pot that then pay a regular retirement income either for life or for a set period.
"The arrival of Covid could have an impact on overall life expectancy and also possibly healthy life expectancy measures, all of which feed into the annuity income that people choosing annuities for their retirement can expect to receive," Ms O'Connor told The National.
“Crudely, greater risk of death increases the amount of retirement income someone will be offered with an annuity.”
While the OBR cautions that its revision to the number of excess pensioner deaths “may appear small given the severity of the current wave”, it said the lockdown “brought in to control the coronavirus has also dramatically reduced the number of influenza deaths this winter relative to a normal year”.
Meanwhile, life insurers saw more protection cover claims last year thanks to the rise in deaths, which prompted debate over whether insurers should have a vaccine-underwriting question.
While life insurers paid out about £200m more than usual last year in protection cover, Mr Edwards said the effect on the non-life industry has been far worse.
"Non-life insurers were paying over £2bn more than expected from major business interruption, and a large amount of travel insurance as well," he said.
The rise in coronavirus deaths has also contributed to an increase in inheritance tax receipts, the OBR said, rising to £6bn in 2021-22 from £5.1bn in 2019-20.
However, it said receipts have been "revised down substantially relative to our pre-pandemic forecast thanks to lower equity prices and lower house prices”, and that “the effect of these on growth in the value of estates more than offsets the small lift to receipts due to the increase in deaths this year”.
While Covid has contributed to the rise, Mr Mody said it is also an inflationary issue partly caused by the freezing of inheritance tax thresholds until April 2026, which was announced in the budget, and the growth in the value of estates.
"There are three factors going on: the freezing of the thresholds, the growth of people’s estates and then to some extent the higher Covid deaths; all that is combining to what seems to be a gradual move in the pattern of inheritance tax," he said.
