I think that I have become a bit of a ‘longevity bore’ since joining Club Vita last year... ...and even worse, it seems to be catching! Gone are the days when life expectancy was the concern only of a select few wise looking actuaries with long beards...it seems that now everyone, from pension scheme trustees, to politicians, to taxi drivers has an interest (and an opinion) on the subject. Perhaps it’s not that surprising; after all longevity is one of the few things that directly affects us all.
What did we learn about longevity in 2009?
While drafting this article in a snowy Glasgow during one of the coldest winters we have seen in a long time, I found myself wondering how many ‘excess’ cold-related deaths we might see in the 2009/10 winter. The ‘excess’ deaths referred to here are the extra deaths that occur during the winter months relative to those occurring in the rest of the year. It was recently calculated that, during the winter of 2008/9 (which felt cold enough at the time!) there were around 36,700 ‘excess’ deaths in England and Wales. The reasons for this ‘spike’ in deaths are as you might expect; the cold itself, seasonal influenza and the exacerbation of underlying medical conditions.
It does seem inevitable that the ‘excess’ death spike for the winter of 2009/10 will be larger than that seen in 2008/9. While these spikes may be seen in pension scheme experience investigations, it is longer term trends in longevity and the individual characteristics of each scheme that is of far greater significance.
A few observations from the recent studies of pension schemes:
• The importance of factors (see Box X) that affect the longevity of individual pension scheme members has been recognised. Many trustees are now using all the information that is available to them to generate longevity assumptions that are bespoke on a scheme level or even on an individual member level.
• It is has now become generally accepted that the use of unadjusted ‘standard’ actuarial longevity tables is typically inappropriate for pension schemes. This should be no great revelation; after all, no scheme is composed of clones of “average” pension scheme members.
• The evidence continues to show that life expectancy is improving by at least 2 years per decade. While there is no consensus over the pace and shape of future improvements in life expectancy, we are seeing trustees modify their previous “cohort projections” using underpins and other amendments.
2009 marked a very important year for the longevity swap market. A longevity swap is a form of insurance against the effects of improving longevity. In effect a scheme exchanges a variable outcome (payments to pensioners being dependent on the longevity of the individual pensioners) for one that is fixed (pre-determined payments to the insurer or bank on the other side of the swap). The first six pension scheme longevity swaps (transfers of longevity risk only) were completed in 2009 – three involving Babcock International Group’s pension arrangements, two with the RSA Insurance Group’s pension arrangements plus a deal with the Royal County of Berkshire Pension Fund.
Finally, towards the end of 2009 the attention of all those with an interest in longevity was focussed on the naked, wrinkly body of one of the world's ugliest animals? No, not a Club Vita longevity consultant, but a small African rodent that is proving to be a biological marvel. These rodents can live to be 30 years old – more than 15 times the lifespan of the average lab mouse – and are resistant to cancer and the effects of oxygen deprivation.
Researchers have embarked on a number of lines of enquiry that may have implications for human health and longevity – here’s hoping that the answer does not involve living underground.
Box X - Lifestyle factors, affluence and health at retirement have been shown to explain up to 9 years variation in life expectancy for 65 year old males: (Source: Club Vita LLP)
What might 2010 bring?
One of my remits in writing this article was to do a bit of future-gazing – I did have to ask – apparently, according to some of my non-actuary colleagues, this is quite different from navel-gazing!
Longevity and scheme governance
Historically, the longevity experience in a pension scheme was only considered as part of a triennial actuarial valuation. Pension schemes are now starting to introduce monitoring of their longevity experience as part of their governance regime – treating longevity in the same way as the other risk areas that trustees deal with regularly (e.g. investment manager performance, administration processes). This is a trend we expect to grow significantly during 2010. Longevity is, after all, considered by most trustees to be in their top three risks, together with investment risk and sponsor covenant (both of which are typically considered at least annually).
Monitoring provides trustees with confirmation of whether their assumptions remain on track. Hopefully this shows that all is well - but if bad news emerges, at least the trustees and company have extra time to plan how to deal with it. The last thing that companies need, as we emerge from the longest recession in UK history, is for schemes to save up bad news and spring it on them at the next triennial valuation.
Further developments in longevity swaps
Many trustees and sponsors will have observed the evolution in risk transfer options available. Indeed, many of you will be been involved in discussions or investigations around buy-out, buy-in or longevity hedging.
We expect that a number of high value longevity swap deals will be transacted during 2010. There are a number of reasons for this:
• pension schemes have become increasingly risk averse having come through a period where funding positions have been eroded by a combination falling asset values, reducing bond yields and improvements in longevity;
• many pension schemes are now closed and maturing. This has lead to a shift in time horizon for many trustees and sponsors who are now targeting a point in the not too distant future when all risk can be removed;
• investment banks are seeking alternative and diversified investment opportunities – trading in longevity risk is an area that a number are likely to enter
• one of the features of longevity swaps that makes them more accessible than a full buy out/in, is that up-front cash injections from the company are not typically required.
By their nature, longevity swaps are complex financial instruments. While the benefits, in terms of risk reduction, are attractive, trustees and scheme sponsors should give careful consideration to the cost of obtaining this type of protection from longevity risk. The longevity swap provider will use sophisticated tools to assess a longevity swap taking into account the factors in Box X (lifestyle, affluence...) and others. Trustees and scheme sponsors should not enter into a longevity swap without careful consideration of the same factors to assess the price, as well as considering the myriad of other issues including counterparty risk, governance requirements and the impact on future buy-in options.
But let’s not get ahead of ourselves. For many schemes, pensioners (who are typically the focus of longevity swaps) will only account for around one-third of the longevity risk. What are those schemes going to do to manage their remaining longevity risk for future pensioners? And even if we see £20 billion of longevity swaps in 2010 (at the top of current forecasts) that accounts for less than 2% of pension schemes’ longevity risk. The real issue is what schemes do to manage the remaining 98%.
Future trends in longevity
Assessing the likely rate at which longevity will improve in the future is an area of focus for many working in the longevity field. The sometimes opposing forces of developments in medical science, levels of exercise and diet will ultimately determine how long we are able to live for (or help us establish whether the human body does have a ‘use by’ date!).
While your life expectancy is improving, there are a few recent developments/findings to consider:
For those whose 2010 diet regime is already wavering there is good news...
...Oxford University have recently released the results of research which indicates that carrying a bit of extra weight on your bum, hips and thighs is good for your health. It is said that the fat in these areas absorbs fatty acids and contains an agent that prevents arteries clogging
...but also some bad news
...the same researchers also indicated that carrying extra weight around the waist has no such beneficial effects
...and even more bad news
...watching television may not be the best approach to achieving the ideal longevity figure – you may have to eat your way to it!
Australian and French researchers have released the results of a study that indicates that time spent in front of the television (or inactive) shortens your life.
On that note, I’m off on a fast walk to the office vending machine to investigate which chocolate bars only add weight below the waist – drop me an email and I’ll let you know which ones I have most success with.