Pensions  

Financial impact of longevity dip

Diagnosed diabetes has roughly trebled for men and women over the past 20 years in England, with real implications on life expectancy. Diabetes is itself a driver of other diseases, such as heart disease and cancer in particular – diabetics have mortality rates roughly double those of non-diabetics in older age. 

We continue to see new medical advances, and there is great hope for treatments in the pipeline such as immunotherapy or gene therapy. We cannot know what medical breakthrough is around the corner, just as an early 20th Century doctor could not have predicted the discovery and impact of antibiotics. Add to this myriad non-medical factors that affect longevity and you can appreciate that future life expectancy is very uncertain.

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Implications

When an insurer is pricing an annuity, they do not look at life expectancy in today’s terms, but try to anticipate what longevity improvements will occur over the policyholder’s life: known as cohort life expectancy. The same can be said for the trustee or corporate sponsor of a defined benefit pension scheme when assessing whether the sponsor needs to plug a funding gap. 

Over the past six years, longevity improvements have undershot expectations, making these parties revisit their longevity projections.

The implications of the recent longevity improvement slowdown are wide-ranging. First and foremost, it has meant a reduction in the anticipated cost of paying pensioners in both the insurance and occupational pension scheme worlds. This has been a welcome reprieve for many corporate sponsors of DB pension schemes battling against rising deficits caused by other headwinds – low gilt yields, we are looking at you.

It has also been a source of profit for insurers with large annuity books, such as Legal & General, which earlier this year was able to announce it was releasing reserves of £400m due to lower life expectancy.

Insurers have similarly been able to soften their annuity pricing for the same reason, which means pension scheme trustees and sponsors may find themselves closer to their goal of passing the scheme to an insurer than they realised. 

It also means the person in the street looking to buy an annuity from an insurer with their retirement savings will see their money go further.

These financial gains are unlikely to stop immediately either. This year is already on course to be a poor year for longevity, meaning those who refresh their views on life expectancies early next year are likely to see them 
fall again. 

Further, because of the averaging and smoothing of past data inherent in the longevity projection models, this phenomenon is likely to continue for the next few years unless longevity improvements pick up and return to the healthy rates seen in the early 2000s.