11 December 2017
The latest data published by the ONS on the number of deaths in England & Wales up to October 2017 indicates that the deceleration in improvements in mortality witnessed since 2011 is continuing. Rather than the number of deaths decreasing each year, the total has climbed since 2011.
If this trend continues to the end of the year, then we can expect the most common model used for funding pension schemes - the CMI Projections Model - to produce life expectancies at age 65 in the order of 1% lower than the current version when this data is reflected.
In simple terms, if we assume that people will have shorter life expectancies (or that life expectancy grows at a slower rate than expected), it will reduce the value placed on a pension scheme’s liabilities.
Reacting to this trend
For trustees and sponsors of pension schemes who are deciding on how strongly to fund their schemes, there is a dilemma as to how quickly they should reflect this trend in the funding requirements of their schemes. Trustees can be wary of reducing their target level of funding given their requirement to be prudent, whereas scheme sponsors typically don’t wish to over fund their schemes.
A key question is: will this trend continue, or is this just a hiatus for a few years? Making a judgment on this can for some schemes heavily influence their decision making. Should they reduce deficit contributions? Should they take advantage of the reduced value of liabilities and consider removing longevity risk? Or should they rest easy believing that longevity increases will continue to slow down so their scheme’s funding position will continue to improve?
Our longevity report
We wanted to hear what pension schemes thought, so, earlier this year we carried out a survey on their views about longevity risk, and how it ranks against other risks their schemes face. We published the results of this survey in our recent longevity report.
A large proportion, 60%, of respondents believe that this slowdown in mortality improvements represents a “new normal”.
However, there is a large amount of uncertainty, so I was reassured to find that the vast majority (87%) were including longevity risk when thinking strategically about the risk profile of their scheme. One third of these stated they were using an approximate method to assess the risk. Although this may be appropriate in some circumstances – such as when investment risk is very dominant – there are tools available (for example, our LCP LifeAnalytics) which can help trustees and scheme sponsors get a better understanding of how much longevity risk their pension scheme is running.
As well as giving lots of insight into how schemes view longevity risk, our longevity report also demystifies the subject so that it can be easily understood and dealt with. We’ve asked a reinsurer to explain how they approach longevity risk, delved into the mechanics behind the CMI Model, and looked into the options for removing longevity risk.
Managing longevity risk
I would encourage sponsors and trustees, whatever they believe about future mortality trends, to consider whether to remove some longevity risk from their scheme. We have seen pricing improve as insurers and reinsurers have responded to the changes in longevity trends. As a result, some pension schemes we work with are now finding that buy-ins, buy-outs and longevity swaps have become more affordable than previously thought.
What you can do:
My advice to trustees and scheme sponsors is:
- Make sure you understand the size of the longevity risk in your scheme, its potential implications, and how it compares with other risks;
- In light of emerging trends, review the assumptions you are using about how life expectancies for your members will develop in the future; and
- Take an active decision about how you intend to manage longevity risk, and review the options to reduce that risk in your scheme.
We continue to monitor the latest developments in mortality and derisking opportunities, and offer up-to-date advice to our clients on how it can affect them.
Making sense of longevity trends
Making sense of longevity trends - a guide to the key issues for defined benefit pension schemes.Making sense of longevity trends