Rapidly rising life expectancy among older men will maintain high deficits for UK defined benefit schemes, according to a new report, despite flatlining mortality rates for other demographics.
Analysis carried out by Club Vita and the Pensions and Lifetime Savings Association found that men in the “comfortable” male pensioner wealth bracket, representing more than half of DB liabilities in a sample set, have added 17 weeks of longevity between 2011 and 2015.
Studies revealing a blip in the trend of increasing longevity had previously led some schemes and commentators to believe that deficits may be overstated.
It might prompt them to think about whether they want to do some longevity derisking
Joe Dabrowski, PLSA
The Club Vita analysis did confirm that death rates in four of the past five years have spiked above the downward trend seen over a broader time frame.
Similar analysis between 2000 and 2010 found steadily decreasing death rates. For schemes who had used the previous Club Vita and PLSA model to set their funding agreements, updating assumptions may lead to liabilities shrinking.
“We’ve seen a very material slowdown in life expectancy in the last five years,” said Steven Baxter, Club Vita longevity expert and partner at consultancy Hymans Robertson. “This is in contrast to what a lot of pension funds had been assuming while funding for their liabilities.”
Crucially however, the analysis found that the same trend has not been observed among wealthier men, defined as those with DB income in excess of £7,500 a year.
The high concentration of “comfortable male” financial situations among the membership of most DB schemes therefore means that schemes switching from national projections like those published by the Continuous Mortality Investigation could see their deficits grow as they take account of their demography.
Baxter said it would be prudent for schemes to pay attention to the particularities of their memberships, in order to gain a more accurate projection of funding needs.
He added: “We’ve seen a really strong period of continued increases for these folks and we don’t really see any evidence or signs of it materially slowing down in our data… so you’d be inclined to assume that it will continue for some while.”
No deficit let-off
The report may dampen the spirits of any schemes hoping for dramatically reduced funding requirements.
A report released by consultancy PwC in May suggested that up to £310bn of UK DB liabilities could be discounted if the trend of slowing mortality improvements continues.
Raj Mody, the firm’s global head of pensions, said the two reports were not as dramatically opposed to one another as they might seem. Scheme demographics should be taken into account, even when schemes use nationwide data to inform their assumptions.
Longevity forecasts will continue to change frequently, he argued, and even a slight slowdown can have a material impact on funding levels.
“If you assumed that members are going to live for a very, very long time, and even if the data goes to show that they live for a long time but not as long as you stated in your deficit calculation, then you might have overstated your deficit,” he said.
Mody said trustees should attempt to understand the life expectancy of their members in clear language, and should consider the fallibility of longevity forecasts when deciding how much cash to demand from sponsors.
How much can employers afford?
While trustees should have regard for sponsor covenant, they should not attempt to cherry-pick longevity analyses, argued Joe Dabrowski, head of investment and governance at the PLSA.
“The guidance from the regulator steers everybody towards using the most up-to-date assumptions,” he said.
While new analysis might increase deficits, “it might prompt them to think about whether they want to do some longevity derisking and talk to their providers about that”, he noted.
Pirelli announces £600m longevity swaps
Italian tyre manufacturer Pirelli’s two main UK pension schemes have agreed longevity swaps covering £600m of pensioner liabilities.
The ultimate cost of providing benefits is not decided by today’s projections, noted Hugh Nolan, president of the Society of Pensions Professionals and director at consultancy Spence & Partners, but may for example be determined by an insurer’s mortality assumptions when a scheme looks for buyout pricing.
“It’s really therefore about how much money you’re putting aside now to provide for those benefits in the future,” he said.
He agreed that trustees should not second guess expert analyses, but schemes with a strong employer did not necessarily need to demand contributions immediately to cover projections that will inevitably be wrong.
For small schemes in particular, projections are rendered less accurate due to idiosyncratic risk. Nolan suggested that they might look to transfer some risk to insurers, where mortality trends can be replicated across a larger membership.
