Living even longer than before

Money Talk
By Graeme Muir
Barnett Waddingham actuaries

Graeme Muir

The Pensions Regulator (tPR) has published a consultation document on how he will look at the mortality assumptions adopted by pension schemes.

The Regulator is concerned that schemes could be under-estimating future improvements in life expectancy.

The mortality assumptions adopted by pension schemes will usually include a "base assumption" about current rates of mortality for its members.

It will also have an "improvement assumption" about how mortality is going to improve in future.

Whilst tPR is concerned about both aspects, he seems more concerned about the improvement assumption.

The consultation document proposes that if schemes do not allow for sufficient improvement (known technically the "long cohort" assumption) then this will attract further scrutiny from tPR and dialogue with the trustees of the pension scheme.

Living longer, but by how much?

Recent mortality studies indicate that, as we might expect, longevity is improving.

Insured lives tend to live longer than pension scheme members, who in turn live longer than the population at large

However the rate of improvement has been much higher of late than observed in the past.

Trying to establish why this is the case, and then deciding if this rate of increase in longevity will continue, and for how long, is not easy.

Whilst medical advances will hopefully continue to increase life expectancy, there are arguably biomechanical limits on how long our bodies will last, in the same way as the improvement in the time taken to run 100m has to plateau somewhere.

In addition there are potentially other "lifestyle" factors - increasing obesity levels, alcohol consumption levels etc which are likely to have a detrimental impact on future improvements in longevity.

Comparisons

The mortality assumptions adopted by pension funds are based on tables that emerge from mortality investigations - usually national investigations of certain classes of individuals.

The actuarial profession has historically investigated the mortality of "insured lives" - people with life assurance policies or annuities - and more recently pension scheme members.

The Office of National Statistics investigates the mortality of the population at large.

The general picture is that insured lives tend to live longer than pension scheme members, who in turn live longer than the population at large.

However, as with all such comparisons, such statements are made by comparing various averages.

They do not reveal the amount of underlying variation due to different factors such as geographical location and size of pension.

Variations

The following "mortality map" shows the now the mortality of the population of England and Wales varies by region.

Mortality map of England and Wales

White areas have "average" mortality; red areas have heavier than average mortality; and blue areas have lighter than average mortality.

As we see there is a fair amount of variation across the country with arguably mortality tending to improve as we head south east.

This is likely to be a function of standard of living - disposable income, housing, diet etc.

Indeed, within each major region there are usually a few "hot spots" - red or blue reflecting different socio economic areas.

Amongst our client funds we do see significant variations in mortality.

Looking at our local authority funds up and down the country over the 3 year period to 31 March 2007, the average age at death amongst pensioners ranged from 76 in the north east of England to 78 in the south west to over 80 in the south east.

Across the UK we also see the average age at death increasing each year, with some evidence of "catch up" in that longevity seemed to be improving faster in areas where overall mortality was heavier than average.

As we might also expect mortality was lighter amongst pensioners with higher pensions compared to those on lower amounts in the same area.

It is still up to the Trustees of each pension scheme to determine the assumptions that should be adopted with some help from their actuary.

Larger schemes with sufficient numbers will find it easier to justify their own base assumption - usually a "tweaked" version of a standard table.

For smaller schemes it will require much more effort if they are to produce the required evidence to justify any non standard assumption.

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