Projecting legacy income and donor numbers to aid financial planning and risk management

We have updated our five-year UK market forecasts to take into account the very latest information on deaths, economic projections and administrative delays due to COVID-19.

All of these factors have deteriorated since our last scenarios were produced at the end of March, signifying a more dramatic decline of 8% to 27% in legacy income over the coming year.

However, the negative impact is expected to be relatively short-lived, and forecasts for the next five years continue to suggest market growth. Even based on our pessimistic scenario, legacy incomes over the five years 2020 to 2024 will be just 5% lower than pre-COVID-19 estimates.

Overall, legacy incomes are still expected to grow over the next five years, increasing from around £3.2bn in 2019 to £3.7bn-£3.8bn in 2024

Many of our regular forecasting clients are telling us how vital our income forecasts are at the moment. Given how fundamental legacy income is for many charities, it’s critical to project – and plan for – the impact of COVID-19, both now and over the next three years. If we can help with your forecasts, please contact Jon Franklin or Tim Yates.

We have updated our UK legacy market forecasts to assess how COVID-19 and the ensuing restrictions will affect legacy incomes over the next five-years.

To support charities’ decision making at this critical time, we have developed two five-year scenarios depicting a plausible range of outcomes.

Overall, these two scenarios suggest that UK legacy income could fall by between 3% and 9% in 2020, reflecting both the worsening economic environment and the delays in receiving notifications and sale of assets from estates caused by the disruption to administrative processes while COVID-19 control measures are in place.

We still expect total legacy incomes to grow over the next five years, rising from £3.2bn today to between £3.7bn and £3.8bn by 2024. But over five years as a whole, we now expect up to 5% less income than we predicted in February, due to the far more pessimistic outlook for house prices and share prices over the period.

For more details, download the report

By Chris Farmelo, Technical Director, Legacy Foresight

Many of our clients have been asking us about the likely impact of the Coronavirus outbreak on the legacy market. In essence, COVID-19 could impact on legacies via a range of quite separate mechanisms. Over the next five years, the most direct impact on the legacy market is likely to be through one or more of the following:

Economic. The average value of residual bequests is driven by economic factors, in particular house prices, share prices and GDP growth rates. These residual bequests are vital to the charity sector, making up over 80% of all legacy income. The coronavirus outbreak is likely to have a significant negative effect on the UK economy; on share prices, GDP, and quite possibly house prices too. However, these falls should be relatively short-term and will probably not stretch much beyond 2020. Looking over the five year period as a whole, we would expect house prices and share prices to show positive growth (from where we were at the end of 2019); average legacy values are therefore likely to continue increasing over the forecast period overall – even though there is likely to be a severe short-term shock in 2020.

Demographic. The number of bequests received by charities reflects trends in numbers of deaths. Although the underlying death trend is now upwards, the number of UK deaths per year has varied significantly between 2015 and 2019: a range of nearly 20,000 deaths between the highest (2018) and the lowest (2016) year. This variation is caused by the severity of winter weather and the prevalence of serious illnesses (be that coronavirus or conventional influenza) amongst the elderly population. It is possible to construct a range of scenarios for the number of excess deaths due to Covid-19 (some of which will include quite extreme estimates of excess deaths) but at the moment it is impossible to estimate the likelihood of any such scenario happening. While some of the people dying as a result of COVID-19 in 2020 may well have died anyway – from another cause – it seems inevitable that the number of deaths in 2020 will be higher than it otherwise would have been. If this does happen then in subsequent years deaths are likely to be a little lower, as a consequence of individuals dying earlier than they would otherwise have been expected to.

Administrative. If people’s ability to reach their workplaces are restricted (either due to illness or measures intended to stem the spread of the virus), this is likely to put pressure on the various administrative functions that charities depend on to receive legacies – including HMCTS, HMRC, the probate registry, legacy administration departments etc. In such a scenario it is likely that charities will not receive/record all the legacies that have actually been left to them during the affected period. Coming hard on the heels of last year’s probate registry delays, it appears that for a second consecutive year, charities will be left with an incomplete record of their legacy numbers, or the income in the pipeline. The impact, particularly in the current year, could well be significant.

So, during 2020 a far weaker economic outlook will reduce legacy incomes (possibly quite significantly), as will potential problems in the administration of legacies. On the other hand – very sadly – a greater number of deaths (particularly amongst older people) will result in higher bequest numbers and hence more legacy income.

We are currently updating our legacy market models and, within the next two weeks, will produce new quantitative forecasts of legacy income over the next five years, including both central and worst case scenarios. These forecasts will be circulated to Legacy Foresight clients, along with a summary for the wider not for profit sector.

As people appreciate events are moving very rapidly at the moment and we plan to take on board developments as they occur, and will make changes to our assessment of the impact when appropriate.

We have updated our 5-year market forecasts in the light of new data on the two most important drivers of legacy incomes, deaths and the economy. Our new predictions incorporate the latest (post-Brexit) UK economic forecasts, along with significant revisions to the ONS’s death projections, published in October 2019.

Based on these new data, we now anticipate the total UK legacy market will grow at 3.6% p.a. over the next five years. This is a more optimistic projection than last autumn when we were predicting annual growth of 3.4% p.a.

By 2024, total UK legacy income will be worth £3.9bn, up from £3.2bn in 2019. Cumulatively, over the 5-year period, UK charities will receive £500m more than previously thought.

The forecast uplift has primarily been driven by higher ONS projections on the number of UK deaths. Latest ONS forecasts suggest that deaths will rise from around 600,000 per year in 2019 to 645,000 per year in 2024; causing a corresponding increase in the number of charitable bequests from about 120,000 in 2019 to more than 130,000 by 2024.

With Britain finally out of the EU, forecasters believe that UK economic activity will improve from recent sluggish levels. GDP growth will climb from 1.3% p.a. now to 1.7% p.a. from 2021 onwards, boosted by rising consumer and business confidence. At the same time, house price growth is expected to accelerate to around 3.6% p.a. by 2024, driving further increases in the average value of residual bequests.

For now, legacy market growth will not return to the levels seen in the run-up to Brexit, when incomes were growing at 4.1% p.a. However, at a time when many charities are reporting flat or falling donations, these forecasts are good news for fundraising teams across the UK.

Legacy Monitor 2019

In the 12 months to December 2019, our 82 Legacy Monitor consortium members received cash legacy income of £1.58bn. Income was up 6.6% on 2018 – an impressive figure given a backdrop of subdued house price growth and falling bequest numbers.

We believe that some unusually large bequests bolstered income growth in early 2019. Meanwhile, total bequest numbers were 9% down on 2018, primarily due to the widely reported delays at probate courts. These delays now appear to be abating, with a backlog of around 3,200 bequests to be processed over the coming months. Legacy notifications should return to ‘normal’ levels during 2020.

At the end of October, the Office for National Statistics released their latest 2018-based population projections with some significant revisions compared to previous predictions. As promised, we have now delved a little deeper into this new data to discover what it all means…

In the latest projections, we see that once again the ONS experts have shortened their assumptions on future life expectancies; and this in turn means a rise in the projected number of deaths. We already saw an increase in projected UK deaths between the 2014-based and 2016-based projections, when total deaths for the 31 year period 2019 – 2050 increased from 21.2m to 22.1m. In the 2018-based projections total deaths are now predicted to reach 22.9m over the same period – that’s a further rise of around 4%.

Looking at the short-term impact, the latest forecasts predict that over the five years to 2024, 3.1 million people will die, compared to 3.0 million projected last time – to be exact, that’s 123,000 more deaths. In legacy terms, this suggests that over the next five years total charitable legacies are likely to be almost 4.1% higher than previously expected – equating to 26,000 more bequests over the five-year period and almost £130m of incremental legacy income per year.

So, what is driving this change in projections? Over the past few decades British life expectancies have been improving, particularly over the period 2000-2010. However, since 2011, life expectancy increases have slowed considerably for both men and women. To put this into context, in the 5 years to 2011, life expectancy at birth increased by 1.6 years in males and 1.3 years in females. In comparison, between 2011 and 2016 this increase slowed to 0.4 and 0.1 years for males and females respectively.

As we can see, although life expectancy is slowing for men and women, the slowdown is worse for women. This means that the longstanding male/female life expectancy gap is narrowing. At the same time, inequality in life expectancy is widening, with the slowdown more accentuated in deprived areas. In the poorest areas female life expectancy has actually fallen since 2011.
The change in projections is linked with certain medical conditions, in particular heart disease and strokes. Up to 2011 we saw mortality rates for both these leading causes of death improve. However, this progress is now diminishing, and that’s having a negative impact on overall life expectancies.

It’s important to remember that although improvements in life expectancies are not as optimistic as previously thought, people will still live longer on average than they do today. Life expectancy for those aged 50 is currently 81.4 for males and 84.3 for females. This compares to 80.9 for males and 84.0 for females back in 2011. By 2050 1.5m people will be aged 90 or over. This may be lower than the 1.8m predicted back in 2016, but it’s still more than double the 600,000 we see today!

The ONS will be releasing data on projected life expectancies by cohort in December, so look out for our next article, when we explore how life expectancies vary by generation and why.

The Office for National Statistics has released its latest 2018-based population projections. The new figures project the UK population to increase by 6 million to 69.4 million by 2043 – this equates to growth of 9%, slower growth than the 15% growth seen in the previous 25 years.

In the 2016-based projections, the ONS experts reduced their assumptions on future life expectancies. In the 2018-based projections, life expectancy increases are lower again. This is due to the continued slowdown in life expectancy growth witnessed over the last two years. Importantly for the legacy sector, this means a rise in the projected number of deaths. During the ten years to 2028, the projections suggest that in the UK 6.4 million people will die, compared to 6.1 million projected last time, an increase of 4%.

We will be digging deeper into this new data over the next few weeks; we’ll share more analysis, including what the changes mean for legacy numbers and income – watch this space.

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There has been much discussion recently about how deaths have been rising faster than the government actuaries anticipated – this appears to be due to the ‘golden cohort’ (born 1923 to 1935) dying a little earlier than expected – in other words, their life expectancies have not risen as much as initially expected.

That said, people are living longer these days. According to figures just published by the ONS the UK population aged 90 years old and over increased once again in 2018 to 584,000. Within that, the 100 years and over population has now reached 13,170 – the oldest Briton being Dorothy Payne, aged 112 and living in Kent.

Step back 30 years to 1990, and there were just 238,000 90+ year-olds (and less than 5,000 100+ year-olds) – so numbers of the ‘very old’ have more than doubled over the period.

Interestingly, it is men who have driven this rise, thanks in part to lower rates of smoking, leading to dramatic falls in lung cancer and heart disease. Historically it is women who have had longer life expectancies; however, as we have previously discussed, life expectancies for men have been rising faster than those for women – so the gap is narrowing. In 1990, there were over four times as many females aged 90 years plus, but this number has nearly halved over time to just over two times as many females than males.

This all means that more men are now outliving their spouses, and the period of widowhood is becoming shorter. Elderly couples are more able to live at home for longer and care for each other as opposed to the remaining widow or widower needing to enter formal residential care.

So, what does this mean for legacy giving?

The changes we’re seeing could have implications for legacy giving, as typically men are less inclined to leave a charitable bequest in their will. Although at the same time when men do leave a bequest it is more likely to be of a higher value.

There are further questions we need to consider: When a partner dies is there an impact on the legacy choices that were made as a couple? Does the remaining partner continue to respect the joint decisions about charitable gifts in wills, or do they review their choices? Also, how does behaviour differ between men and women?

We are planning some major new research into will making trends and behaviour in the 21st century, which may shed more light on this topic.

Look out for updated analysis on mortality rates

The ONS will announce updated population projections, including assumed mortality rates, in November. Our analysts will be looking at the findings and, asking what they might mean for the legacy sector – watch this space.

With big changes afoot regarding the future of the Wills Notifications Service, Legacy Foresight is working closely with colleagues from the Institute of Legacy Management to try to ensure the best possible solutions for both the short and long term.

The Wills Notifications Service is an essential tool for charities, that enables them to manage the administration of estates, forecast their legacy income and plan their services accordingly.

Our analysis team has been working to quantify the impact a break in the notifications service would have on the sector. While there is a commitment from HM Courts & Tribunals Service (HMCTS) and the Ministry of Justice to ensure there is a seamless transition to the new system, any delay in developing the new service could have serious implications on charitable incomes and therefore their spending on services.

As our Consortium members’ legacy income accounts for 50% of the market in value terms, we believe that over the coming year Legacy Monitor will play an even more important role as the sole source of aggregated market information. Although Legacy Foresight cannot adjust the data we report to account for any missing bequests, we can monitor and comment on the changes as they unfold. We hope that this information will be useful for sector-wide lobbying as well as helping individual legacy teams to track and forecast their own legacy performance.

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