Trends in longevity and mortality have proven difficult to forecast historically, but are vital to funding schemes and ensuring adequate retirement pots. James Phillips explores the key influences
Understanding the impact of longevity trends is absolutely critical to ensuring retirements around the world are funded to an adequate level.
For savers, guessing how long they might live is not enough, especially in an environment with Freedom and Choice. For defined benefit schemes, it is necessary to ensure enough money is going into schemes to fund promises. And for governments, it is critical to getting long-term policy right and mitigating later drains on public finances.
Yet the practice of doing so is inherently complicated and, despite all the actuarial science that has been developed to aid this, has historically been proven incorrect, largely due to unexpected events or advances.
Towards the end of last month, speakers at Longevity 14 - an annual international conference dedicated to the subject and the market built on it - discussed the problem.
University of Southern Denmark professor James Vaupel - also a director of various global institutes studying ageing populations - said there may be developments in the future that society could just not even dream of today.
"The difficulty in forecasting longevity in the future is that the future could be different from the past," he said. "All sorts of things have happened that were not anticipated. If you want to forecast longevity in the future, you have to predict the unpredictable."
In particular, huge strides have been made in medical treatments, providing significant boosts to life expectancy that were not previously perceived.
For this reason, Vaupel criticised actuaries, noting that their previous estimates of life expectancy improvements have often been proven wrong.
"Actuaries have had a long history of relying on expert judgement; a shameful history where the experts have been wrong over and over again, but never admit it," he continued. "Actuaries have a gut feeling; this doesn't work. There are some uses for expert judgement, but we have to be really, really careful."
"I don't think we can do any better than to assume the surprises in the future are comparable to the surprises in the past. All biomedical breakthroughs in the future are unpredictable."
Indeed, recent trends have dampened expectations of high improvements of life expectancy. The trend that has persevered since the start of the decade is no longer considered a blip.
Last month, data from the Office for National Statistics revealed that the annual life expectancy improvement rate for both men and women had fallen to its lowest ever level since the authority began gathering figures in the 1980s. For women, the rate was negative.
And similar figures from the Continuous Mortality Investigation, published in March, found reductions in life expectancy at birth.
Reinsurance Group of America senior vice-president and head of global research and development Peter Banthorpe noted smoking cessation, in the UK in particular, had led to lower mortality estimates in the noughties.
Yet, the recent slowdown could be attributed to a range of factors, all of which are up for debate: excess winter mortality, effectiveness of flu vaccination, obesity, diabetes, cuts to spending on health and social care, and antimicrobial resistance.
"Nobody really knows what the real impact is going to be, but there is going to be an impact," he said. "There is a lot of uncertainty."
Added to this, there is the lack of predictability of government policy. For instance, in the UK, a change in government could see NHS spending go up or down, while other policies may take political priority, such as Brexit.
One way or another, political impetus to respond to recent demographic and longevity trends is low. While the government has tentatively scheduled raising the stage pension age to 68 in the late 2030s, its capacity to deal with a wider range of long-term trends is limited.
Cass Business School professor and Pensions Institute director David Blake said: "Governments just kick the can down the road. The political business cycle of five years is not conducive to solving long-term problems; our democratic system is not suitable for solving this.
"Politicians overburdened with solving today's problems are not going to worry about problems that will occur in 15 years' time. No-one responds until there is a crisis."
This is not helped, he said, by "pensions ministers that are in the job for six weeks".
Yet there are policies that can be introduced that may be seen as short term but actually have a long-term impact.
As Universities Superannuation Scheme (USS) group risk officer Guy Coughlan explained, education can be a driving force for improving life expectancy and lifespan equality.
"Education is actually the common driving force for both income and life expectancy, and education policy should be an important and primary way of addressing inequalities in both those respects," he said.
This is the experience of USS, he added; either that, "or the laid-back, low-stress lifestyles of professors".
It is clear that longevity is not easy to forecast. A plethora of influences, including geography, public spending, and education, can make significant differences.
And future improvements in medical treatments, or changes in government policy, could have a profound impact. For a pension scheme running over a long time horizon, this makes it difficult to predict how assets and liabilities will change.
How they should therefore rely on these forecasts is up for debate.
Nearly every trustee is confident of the next stage in their scheme’s strategy, despite almost an equal number being forced to consider replacing plans within the prior 12 months, according to research by Barnett Waddingham.
Companies could be overstating their pension liabilities by up to £60bn due to their life expectancy assumptions, according to XPS Pensions Group.
Defined benefit (DB) schemes that provide GMPs must revisit and, where necessary, top-up historic cash equivalent transfer values (CETVs) that have been calculated on an unequal basis, a landmark court judgment said last week.
Regulators must act now to impose some "proper regulation" to stop another defined benefit (DB) transfer advice disaster, saysTim Sargisson.
Opportunities for defined benefit (DB) schemes to pursue investment approaches that help repair the UK’s economy cannot stand in the way of improving member outcomes, Aegon says.