Current issues in the fields of the economy, (responsible) investment, pension and income: every week, an APG expert provides a clear answer to the question of the week. This time: Actuarial Director Alexander Paulis on the impact of corona on the life expectancy and financial position of Dutch pension funds.
Just under two years. That is by how much American life expectancy fell between 2018 and 2020. That is, if you are to believe research from Virginia Commonwealth University, the University of Colorado Boulder and the Urban Institute. Cause: the pandemic, which caused the biggest drop in American life expectancy since 1943.
What about the Netherlands? Paulis raises his eyebrows when he hears about the American results. "Of course, this is just a snapshot. It is virtually impossible to determine now to what extent the death rates of the past two years are representative for the future. First, the situation must normalize. If there is going to be a new normal at all, it will be when everyone is vaccinated and we can see its effect on infection and death rates."
AIDS
The corona effect on the death rates of the past two years (about 10 percent excess mortality according to Statistics Netherlands) is a short-term development that is pretty much useless for making predictions, according to Paulis. "Pension funds plan for the long term. And when it comes to corona, we don't know anything about that yet. For long-term predictions, you need a sufficient basis – observation years. We're used to looking far back in time and not letting the last year be all-decisive. In the 1980s, we initially also thought that the AIDS epidemic would have structural consequences for life expectancy. In the end, it turned out to be no more than a ripple."
To answer the question of how representative the first years after 2020 are for what we will see in the future, you have to cross a kind of actuarial boundary, according to Paulis. "You'll also need to talk to medical experts, such as virologists. Actuaries are always cautious about this, because it quickly leads to subjective, political discussions. But don't think you can escape it in this case."
Contrary
Normally, a 'base' is also created for life expectancy by looking at other, comparable countries. However, we shouldn't expect any benefit from this in the short term, says Paulis. "Especially with corona, we've seen that the differences between countries can suddenly be very large."
There is another reason not to let the first years after 2020 be too decisive for the long-term prognosis of the death rate. "During hot summers, for example, we also see excess mortality. Summers like that particularly claim the lives of people who are already more vulnerable. As a result, you're left with a relatively healthy population, which often results in below-average mortality. The same counter-effect could occur with corona."
Drop
Anyone who thinks that pension funds will undoubtedly benefit financially from corona mortality is mistaken, according to Paulis. "If participants whose retirement pension hasn't yet commenced die, surviving dependents receive a partner's and orphan's pension. This could be financially more disadvantageous for the fund, especially when it concerns young surviving dependents. But if someone already received a retirement pension, that will lapse. The survivor's pension that replaces this is lower. On balance, this is more beneficial for the fund. Because it was the elderly in particular who died of corona, we have had a modest 'positive result on mortality' in the past year, as an actuary calls it somewhat clinically. But that was a drop in the ocean, so to speak – a few tenths of a percentage point at the most of the coverage ratio. Interest rates, investment returns and, nowadays, often also the premium have a much greater influence on the financial position."
Unusable years
So for the time being, there's no reason to assume that life expectancy in the Netherlands is falling? Paulis: "That's correct. For a long-term forecast, 2020 and 2021 are the most useless years imaginable. Pension funds shouldn't be over-optimistic about the consequences of corona for the time being."