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Inconvenient truths

12 December 2019

A chief executive of one of the big insurance companies surprised me by saying that life expectancy was no longer increasing, so he expected to make far more money out of his book of annuities.

A couple of months ago the chief executive of one of the big insurance companies surprised me by saying that life expectancy was no longer increasing, so he expected to make far more money out of his book of annuities (which pay money to policyholders until they die) then he did when the business was written. It was startling because it was completely at odds with the generally accepted view – and the one still promoted by actuaries and pension consultants – that life spans are increasing by about a month a year.


Meanwhile the pensions industry is getting ever more enthusiastic about longevity swaps – a financial device which puts an upward limit on the number of years pension benefits will have to be paid by a fund. If people live beyond that point all further costs will fall on an outside insurer. This removes the risk that by living longer a small number of pensioners will absorb  a slice of the pension fund so that there will not be enough for everyone else.


Such deals are becoming ever more sophisticated and some embrace multiple schemes for different classes of member within the same group, but these do not come cheap. The counterparty is usually a re-insurance company but there is normally also an investment bank involved, so the fees mount up and you do of course also have to pay for them to take on the risk you are trying to shed.


But the real irony is that just as these deals are becoming the established wisdom among trustees, the Office of National Statistics (ONS) has begun to scale back its expectation that people will live ever longer lives – the point noted by the insurance executive quoted earlier. In fact the ONS now thinks that while the same proportion of people will get to 90 as it suggested in the past, fewer than before will make it to 100 and there is a similar mild scaling back in most of the other age bands.


This chimes in with some work on the same theme published by the ONS a couple of months previously. Back in 2009 the ONS projected that on average, a man aged 65 would live a further 19 years and a woman 21.3 years, to 84 and 87 respectively. The 2013 data suggests the man will have only 18.3 more years and the woman 20.6 – a change which may not seem much in terms of weeks and months, but which at a stroke knocks about 4% off the cost of their pension.
It appears that the ONS has changed tack because while mortality improvements were faster than expected in 2011, they did not come close to expectations in 2012 and 2013. ‘Just as everyone was getting used to very fast year on year improvements in mortality rates, these have come to a halt’, as one consultant succinctly remarked.


There is a statistical as well as a medical reason for trimming the numbers. The recent census showed there were fewer people in their late 80s than the ONS expected to find, which means they have been dying off in greater numbers than the statisticians thought. Obviously if you do not notice someone has died, you get a false idea of how old they are, which does rather mess up the figures.


The implications of this, if it continues, are profound. All those pension schemes which were said to be unaffordable might not be after all. The expectation that the retirement age will have to increase further, might no longer be valid. The plans companies make to cope with an ageing workforce may have to be reviewed. The projections for the amount that might have to be spent on care for the elderly look less certain.


So the great question is whether this is a blip or a trend? Is it just temporary slowdown in the long upward march of longevity for reasons we do not yet understand? Or is it a sign that we have had the easy wins from healthier eating, cutting out smoking and reducing infant mortality, all of which delivered big one off boosts to life expectancy, but henceforth progress will be much slower or even as obesity takes hold, non-existent?


So how is the financial, business and political world coping with this challenge to one of its most basic assumptions – increased life expectancy? Like all inconvenient truths, it is being ignored. Only when the cumulative evidence is overwhelming – which by definition will take many more years of data – are attitudes likely to shift.


It is however, rather humbling to think that although there is no question in social policy more important, no one has a clue as to what is the right answer.

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