Aon Hewitt is reiterating its call for pension schemes to review the emerging lower rates of UK mortality improvement to ensure fair pricing of longevity insurance transactions.
The consultant had previously said schemes should consider delaying longevity swap transactions as lower rates of mortality improvement had led to a dislocation in pricing.
Aon Hewitt's head of risk settlement Martin Bird said: "In the second half of 2016 we were concerned that some reinsurers were operating with out-of-date pricing. We worked hard to address the potential price dislocation in the longevity market and we are optimistic that - with mortality data now available right up to the end of 2016 - insurers and reinsurers will be able to update their pricing to be consistent with current improvement trends."
The data shows that over the past six years, male mortality rates improved by less than 1% per year. This compares to over 3% per year during the previous decade. This reduces projected future improvement, and potentially reduces liabilities by 3-4% compared with the view of only a couple of years ago.
Analysis of reinsurance pricing levels in the fourth quarter of 2016 demonstrated that schemes which chose to delay deals had typically seen price reductions of up to 2%. This is equivalent to a £20m saving on a typical £1bn deal.
Tim Gordon, partner and head of longevity in Aon Hewitt's Risk Settlement Group, (pictured) said: "We now have six years of data that shows mortality rate improvements substantially below that seen in the first decade of the century. Over the course of the year you would expect the reinsurers to factor this evolving data into their pricing and we are seeing this happen."
He added that schemes must ensure their consultants are alert to the issue to ensure they can get the best price.
He added that it is difficult to determine any one key factor leading to the shift: "It is extremely difficult to allocate any one driver to this and it is certainly not a UK phenomenon," he said. "It is also something we are seeing across north-west Europe. However, we saw a real expansion in longevity expertise in the UK in the early 2000s and there was a view that longevity improvement has been understated in the early part of this decade. Maybe what we are seeing is a return to historical norms and the question we should be asking is what drove the mortality improvements we saw in the first decade of this century. This could include things such as a reduction in smoking."
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