After years of steady increases, improvement in life expectancy dropped to 1 per cent a year in 2016 from 3.1 per cent per year in 2011 in England and Wales, but low discount rates mean the rises still matter.
Although the decline bucks a trend that lasted between 1991 and the mid 2000s, 60 per cent of defined benefit scheme trustees and sponsors viewed the recent slump in life expectancy improvement rates as the “new norm”.
Seventy-five per cent of respondents to the survey conducted by consultancy LCP indicated an intention to conduct a risk transfer as part of their journey plan.
Buy-in and buyout pricing is reflecting the trend towards lower life expectancy increases, which improves pricing from the scheme’s perspective
Jay Shah, Pension Insurance Corporation
It is harder than before to predict longevity
Myles Pink, a partner in LCP’s insurance derisking team and co-author of the report, attributed the previous rise in longevity improvement to the smoking ban and the quality of cardiovascular care.
Pink also cited the role played by an ageing population, along with changes to the funding of national healthcare.
“Now that’s played out… there is not as clear a medical advance or development to support the next wave of improvement, but that could come,” he said.
“There are different killers now of people that need to be addressed and we’ve had a bit of a lull in medical advances at the moment, so we’re seeing this slowing in the pace of improvements of life expectancy,” he added.
Schemes such as the JT Dove Pension Scheme and the Sony United Kingdom Pension Scheme have adopted a more sophisticated approach to longevity risk and collected medical data from their members in order to get a better understanding of their liabilities.
“It’s actually harder to predict improvements in life expectancy than it has been for the last couple of decades, where there seems to have been a fairly consistent trend,” Pink said.
Lower discount rates mean greater focus
The report states that 87 per cent of schemes now include longevity risk in their risk profile. Seventy-one per cent of schemes use Continuous Mortality Investigation projections for funding plans, of which two-thirds use the most recent version available.
The CMI model is predicated on the belief that in the short run, longevity improvement rates will be similar to those witnessed in the recent past. In the long run, improvements will converge into one long-term rate.
Tim Gordon, partner in Aon Hewitt’s longevity modelling and advisory team, said: “When you have discount rates of around zero or possibly negative, then longevity risk is a much bigger deal than it was 10 or 15 years ago.”
The higher discount rates of the early 2000s reduced the impact of increased life expectancy, which subsequently lowered the importance of longevity to schemes, according to Gordon. Lower discount rates served as a wake-up call.
“I think when the actuarial profession really got to grips with longevity we were going through a period of actually unparalleled mortality improvement,” he added.
Steven Baxter, head of longevity innovation and research at consultancy Hymans Robertson, observed the importance of considering socioeconomic backgrounds when examining longevity risk.
“The higher socioeconomic groups, which are roughly one-third of a typical scheme’s membership, but around about two-thirds of their overall liabilities… seem to have been pretty resilient to what we’ve been seeing in terms of slowdown, they haven’t slowed down at all,” he said.
Risk transfer pricing is improving for schemes
Achieving progress towards long-term objectives tops the concerns of DB schemes, according to research by Aon. Completing a buyout remains a key DB objective.
Schemes may identify the falling level of risk associated with lower longevity improvement rates as an opportunity to exploit lower pricing for risk transfers.
Jay Shah, head of origination at buyout specialists Pension Insurance Corporation, said: “From an insurer’s perspective, what is probably quite important isn’t so much what we think is happening, but what the reinsurance community is willing to charge for taking away longevity risk.”
Progress towards long-term objectives tops list of DB concerns
Concerns over long-term objectives, managing funding constraints and keeping up with change rank at the top of concerns held at defined benefit schemes, followed by the task of balancing stakeholder interests, new research has found.
Shah said that reinsurers are giving some credit to the recent decline in longevity improvement rates, but are conscious of the short-term nature of this drop.
"We as an insurer are then factoring that into the pricing for buy-ins and buyouts that we’re able to offer to pension schemes,” he said.
“I guess the message to pension schemes is [that] buy-in and buyout pricing is reflecting that trend, which improves pricing from the scheme’s perspective.”
