UK - The Financial Services Authority (FSA) has warned life insurance companies to strengthen their life expectancy assumptions and set more money aside to pay long-living pensioners.
In a letter from the FSA to CEOs of ‘life companies and friendly societies with annuity liability greater than £100m’ it said: “We are aware that reasonable assumptions for future annuitant longevity improvements are subject to significant industry and professional debate.”
The FSA said most firms currently used the medium cohort projection as their valuation basis, often with a minimum level of annual mortality improvement.
The letter stated: “We are concerned that in applying our existing rules, firms may not be giving sufficient weight to the possibility that their policyholders may live longer than expected.”
The FSA has advised firms to “err on the side of caution” when predicting longevity and “include an appropriate margin of prudence as they move from their best estimate assumption”.
Paternoster chief executive Mark Wood said: "As we consider current reserving to be inadequate in light of observed trends, we welcome this broader debate. With male life expectancy at age 65 increasing at a striking rate of five hours per day, giving this issue careful consideration is imperative."
The Pension Insurance Company, the specialist life company in the pensions area, has calculated that the impact of the FSA’s demand for greater prudence could be as high as 10% of the gross liabilities to pensioners.
It anticipates growing pressure on corporate pension funds from a broad group of vested interests to use insurance to dilute the risks inherent in the current status quo where the security of pensioners’ annuities is reliant on corporate sponsors.
Pension Insurance Corporation chief Edmund Truell said: "The FSA's call for greater prudence is long overdue. The issue of longevity can only be addressed by pension funds facing up to the fact that most assumptions are totally out of date. Time is running out for those funds out there that haven't taken a responsible stance on this issue."
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