Posts Tagged ‘Mortality’

Angela Burns

The period for responding to the Financial Conduct Authority’s (“FCA”) consultation on pension redress has ended with replies having to be submitted by 10 June 2017.  The FCA is expected to issue a response in Autumn 2017.

So how did we respond….what did Spence think was the correct way to calculate pension redress payments?

Overall, we agreed with many of the proposals put forward by the FCA with an overriding requirement that the methodology had to be simple.  We welcomed changes that simplified the calculations such as how to allow for expenses prior to retirement and how to allow for the fact that individuals may take a tax free cash sum at retirement.

We deviated in one main area – we do not believe that the level of redress should mirror insurer pricing, primarily because individuals no longer have to purchase an annuity at retirement (and are clearly not doing so).  Allowing for insurer pricing provides individuals with an excessive level of redress that is not reflective of the cost of providing the benefit in the DB arrangement.

We felt there should be an allowance for the inflation risk premium in deriving the inflation assumption.  Index linked gilt prices continue to be impacted by under supply/over demand in the market, artificially increasing inflation assumptions that are based on market prices.  This is even more apparent in the current environment where demand for index-linked gilts remains high and inflation assumptions have continued to increase.  Our view is that there should be an allowance for the inflation risk premium, this should be market related, and it should be provided each quarter with the updated financial assumptions.

Finally, we have a different view on appropriate mortality assumptions.  The FCA has suggested a mortality basis in line with that used by insurers in pricing annuity contracts.  However the individuals considered are (or have been) members of defined benefit pension schemes.  We believe that tables based on the experience of Self Administered Pension Schemes (SAPS) would be more appropriate to reflect the expected mortality of these individuals.  We also believe that the most up to date experience from the CMI should be adopted for mortality improvements i.e. the 2016 CMI tables.  Overall this would result in lower life expectancies and lower redress payments, and would reflect our view that the level of redress should not reflect insurer pricing.

We await the results of the consultation with interest.

Hugh Nolan

Spence & Partners latest blog for Pension Funds Online:

The Pensions Regulator’s annual funding statement for 2016 includes the following comments about the latest mortality projections available:

“The 2015 version of the Continuous Mortality Investigation model (CMI2015) produces life expectancies that are lower than the 2014 version. We would consider it reasonable for trustees who use data from the CMI, to update to CMI2015 if they wish. However they should consider with their advisers what the effects would be if this reduction is reversed in the coming years. The CMI model is driven by assumptions, one of which is the single long-term improvement rate, and we would consider it unlikely to be appropriate to make any changes to this assumption until it is clearer that recent experience is indicative of being a trend over the longer term.” Read more »

David Bogle

Spence & Partners, the UK pension actuaries and administration specialists, today shared its concerns that with figures from the ONS* showing newborn female babies are expected to live to 93, and male babies to at least 90, if pension savers don’t fully understand longevity risk (that they will outlive the funds in their pension pot) when planning their savings, they may be facing a long and financially difficult retirement.

David Bogle, Mortality Expert, Spence & Partners said: “People need to start understanding how their retirement prospects will be impacted by uncertainty around their own life expectancy. Research published last week by the Office of National Statistics (ONS) projected that in 50 years’ time newborns in the UK will be expected to live past 97 – life expectancy has vastly increased since previous generations, and this underlines the importance of fully understanding our own longevity risk and ensuring we are putting enough money aside. Unfortunately we just don’t expect to live as long as we will, and it is crucial that this is factored in to everyone’s retirement planning.” Read more »

David Bogle

Last time, I wrote about the latest mortality projections from the Continuous Mortality Investigation (“CMI”) and the effect this could have on pension scheme liabilities and that it may provide some relief for trustees and sponsoring employers. I then began to cover how mortality affects members of Defined Contribution (“DC”) schemes. This blog covers these issues in more detail.

In DC schemes, members pay contributions towards their own personal fund at retirement, referred to as the “accumulation” phase. When the member retires, they use that fund to finance their retirement, in pretty much whatever way they choose (i.e. the “decumulation” phase). The growing trend towards this process has prompted a joint paper by three actuarial bodies (the Australian Actuaries Institute, the Institute and Faculty of Actuaries and the American Academy of Actuaries), on the issue of longevity risk (“the Joint Paper”). Read more »

David Bogle

Over the past few weeks there have been some publications in the field of mortality that make for interesting reading. In this blog, I am going to focus on the Continuous Mortality Investigation (CMI) producing their latest mortality projections – which, quite surprisingly, showed that mortality rates were higher in 2015 than 2014.

In figures, because that’s what we actuaries like, 2015 mortality improvements are estimated to be around 2.3% p.a. lower for 18-102 year olds and around 3.2% p.a. lower for 65-102 year olds.

So, the 2015 figures alone show a slight reversal in the continual improvement in mortality seen over recent years, and highlight the slowdown in the rate of mortality improvements. We have seen this in previous versions of the CMI mortality projection model, with new models producing lower life expectancies than the previous iteration being the norm in recent years. Looking at the four year period from 2011 to 2015, average annual mortality improvements using the CMI model are estimated to be around 0.3% p.a. for the 18-102 age group and 0.1% p.a. for the 65-102 age group. Therefore, average life expectancy is estimated to have increased by around 3-4 months over the whole of the period between 2011 and 2015. In comparison, in the period from 2000 to 2011, life expectancy increased by around 3 months each year. This emphasises the potential slowdown in mortality improvements shown by the CMI model. Read more »

David Davison

I’ve seen a number of exercises recently which have looked to model potential scheme mortality costs in relation to the quality of health of the scheme membership. The rationale is that certain employers may have a workforce which is likely to be in poorer health and therefore have a lower life expectancy than might be assumed as ‘standard’. This can then be used as a basis to adjust the mortality assumptions and therefore reduce liabilities, deficit and ultimately costs.

Whilst the results of these exercises are often illuminating I would seek to add a note of caution to the process and those considering such a review need to consider the positives and negatives. Read more »

Neil Copeland

Will the recent European Court of Justice (ECJ) ruling over gender-based pricing of insurance products result in a rebirth of Haruspicy?

Pretty much since the Enlightenment we have got used to approaching the world in a logical fashion. The Oxford English Dictionary says that scientific method is: “a method of procedure that has characterised ….. science since the 17th century, consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses.”

Over time observations and measurements of life expectancy have been made, formulated  and tested and a hypothesis developed which says that women live longer than men.

Hypotheses tend to represent the generally accepted position. Hypotheses are subject to periodic retesting and where, after rigourous testing, a hypothesis appears to no longer adequately explain an observed phenomenon then it can be replaced by a new hypothesis which offers a better or more complete explanation. Whilst no hypothesis would ever be held to be an eternal truth, neither would it be discarded or ignored without a compelling rationale to do so.

The learned members of the ECJ, however,  appear to have overturned the current hypothesis on life expectancy, not because compelling statistical evidence has emerged which suggests the hypothesis is not valid, but on a whim because it is not “fair”, whatever that means, and objective justification no longer seems to be a defence.

So it looks like we will be faced with the outlawing of gender based pricing by the end of 2012, and I’ve been trying to think of alternative approaches which insurance companies could use to help them price their products, and I’ve come up with Haruspicy. Read more »

Alan Collins

If life expectancy was measured on the mars bar scale, Kensington and Chelsea would be “fun size” and certain areas of Scotland would be “deep fried”.

I assume pension buyout specialists Pension Corporation use a more sophisticated method of measurement. I read with interest their press release yesterday which stated that pension schemes with Scottish members may be over-estimating life expectancy and therefore actual pension liabilities may be lower than currently estimated. Read more »

Valerie Hartley

Recently I read with some interest figures showing that different generations of women are witnessing an altering pension’s landscape, with many of today’s young adults not saving enough for their retirement. Tell us something we don’t know!  As most of us do know, the earlier they start, the better off they could be. However, by turning their backs on saving for a pension young people are increasing their chances of facing poverty in old age.Official figures also show that the number of women aged 22 to 29 in the UK who are signing up for a workplace pension has fallen for four years in a row, marking the most rapid decline of any age group.

It is apparent that people are often waiting for decades after starting work before they consider how to pay for retirement. It has since emerged that experts are now warning that a new scheme to ensure employees get into the savings habit will be insufficient and offer workers a false sense of security.

Latest figures from the Office for National Statistics show that currently more than half of the UK’s single pensioners have a pension income of less than £10,000 per annum, and the UK has an ageing population. By 2034, 23% of the population is projected to be aged 65 and over, up from 15% in 1984. An estimated eight million workers have no pension provision and face having to rely on the state pension and benefits to pay for 20 years or so of retirement.

The Survey shows that less than 40% of men and women aged 22 to 29 contributing to a scheme offered by their employer.  These workers are missing out on a pension provision that is generally the most generous of pension policies, compared to a personal pension plan where there is often no employer contribution.

For today’s 20-somethings, pensions have fallen down the priority list as they face up to more pressing financial concerns. In the past the pension system assumed that women did not need a pension, they needed a husband!!  One woman in particular was quoted in the Press as saying, ‘I am struggling to pay off my debt and so at the moment every penny of my monthly salary is needed for rent, living and debt.  After my debts are cleared I think the focus at my age is to start saving to invest in property. This seems more relevant and urgent than a pension at this point in my life.

Is it the case that the only people in their 20s who think about pensions are those who sell them?  Pensions Minister Steve Webb expressed his concern that complications, as well as poor awareness of the pension system, has turned many young people away from thinking about how they will fund for old age. Most young people starting in a job do not get around to thinking about pensions for years because when young you think you will live forever and a pension is something for your granny. Other people assume that their home will be their pension.

No-one is expecting 20-somethings to become pension geeks, but what we do want is to demystify it, make it simple and ask the question, what sort of standard of living do you want when you are old?.  A new system that will automatically enrol people into a workplace pension scheme will get young people into a savings habit and it will also tackle the dividing line between pension provisions depending on people’s choice of career. At present, workplace pension scheme take-up is more than 90% in public sector jobs such as public administration, defence and social security, compared with just 6% in shorter-term accommodation and catering work.

Some people argue that an entire change of culture is needed to make pensions affordable.  We are all expected to live longer, not such a great prospect if we are all going to be poorer. It doesn’t need to be that way but people do need to rethink the way they approach later life. Perhaps this could mean working part-time during pension years? Who knows, but one thing for sure is that without adequate savings many people may no longer have the choice other than to stay at work.

Michael Selby

It was Albert Camus, the existentialist Algerian goalkeeper and sometime philosopher, who said “It’s no use reminding yourself daily that you are mortal: it will be brought home to you soon enough.”

The huge amount of press comment on mortality recently has brought home its importance to life insurance companies and trustees and sponsors of final salary pension schemes.

The position is additionally complicated for smaller final salary pension schemes as for them it is not only the risk that the assumptions being used are wrong but that the experience of their scheme differs very significantly from the average. Clearly the larger the scheme, the more diverse and regionally based the membership the more likely the mortality experience of the scheme is to match the socio-economic groupings of the population as a whole. Conversely, of course, the smaller the scheme the more likely it is to have experience which differs significantly from the whole.

Primary research we’ve carried out in to what I have called ‘the small scheme effect is shown below.

In simple terms this research shows that even where the underlying mortality rates have been predicted correctly the smaller the scheme the more it could suffer from funding fluctuations as a result of the randomness of mortality. This reflects the two extremes that the scheme membership could all die considerably earlier than expected or live considerably longer.

This raises a very difficult issue for scheme trustees and sponsors. In the latter case the scheme could be providing benefits for members for much longer than would be anticipated. This would mean that the ultimate cost of providing these benefits would be higher than anticipated, requiring larger contributions to reflect this.

On the other hand should mortality experience be better than expected (by which I mean from the sponsoring company’s perspective) then there is a risk that the scheme would be over contributing for the benefits being provided. There would clearly be a concern on the part of the employer that should this happen there would be a risk of a ‘trapped surplus’, namely money held within the scheme over and above that needed to provide benefits which could not be returned to the employer.

Our view therefore would be that, particularly for small schemes, this makes the use of contingent assets more attractive as it provides security for the scheme trustees and therefore the members as well as minimising the risk that the employer will over contribute.

In addition as mortality assumptions in schemes are forced to strengthen the margin between the funding position of the scheme and the buy-out cost may narrow making the security of a buy-out solution more attractive.

Improvements in mortality are generally unwelcome to sponsoring employers as they imply higher pension scheme costs however they need to be addressed or there is the potential to waste resources if the right future funding decision is not selected.

Schemes could greatly benefit from carrying out a specific mortality assessment on their scheme to provide some additional insight. This is a relatively simple and inexpensive process which greatly assists in providing a basis for mortality assumptions used in funding negotiations and for accounting disclosures.

As Bill Shankly, the Scottish philosopher and sometime football manager, nearly said, mortality is not a matter of life or death, its more important than that!

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