Made to measure mortality assessments crucial as longevity risks rise

With longevity risk at 25% of DB investment risks, report urges schemes to assess mortality

Jasmine Urquhart
clock • 4 min read
Stuart McDonald: It’s time for schemes to ditch the one size fits all approach to longevity risk
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Stuart McDonald: It’s time for schemes to ditch the one size fits all approach to longevity risk

Lane Clark & Peacock (LCP) has advised defined benefit (DB) schemes to better understand how their membership will be affected by longevity trends.

LCP's latest report into longevity risk - which analysed data from more than 300 pension schemes - noted that, as longevity risk now stood at around 25% of all DB scheme investment risks, and was set to increase in the future, schemes should ensure they have "made to measure" mortality assessments.

The report said longevity is a "significant unhedged risk for many schemes" and could be "one of the few risks remaining that could blow the scheme off course", with many schemes having already hedged most of their investment risks.

LCP said: "If intending to transfer liabilities on to an insurer (or alternative provider), then schemes will want to assess whether the premium provides good value-for-money versus the risks removed."

It noted that the consequences of not understanding longevity could impact areas such as cashflow commitments, employee and member benefits, and financial performance of sponsors.

It advised schemes to understand how their members had been affected by the longevity trends since the pandemic, to focus on the characteristics of members to see if they would be likely to be affected in the future, and review how longevity risk is incorporated into their scheme's overall risk profile. It also suggested incorporating a range of expert views, supplementing actuarial advice with input from mortality experts.

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The report found that mortality rates in 2022 were around 4.5% higher than those in 2019, equivalent to around 30,000 additional deaths in the UK. As of January 2023, there were also more than seven million people on NHS England waiting lists, which LCP said was "worrying given that early consultation and diagnosis can have a significant impact on morbidity and are likely to affect mortality rates over the longer term".

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The report identified factors which contributed to mortality including rising ambulance and A&E waiting and admission times, rising sickness absence rates among NHS workers, a severe and early flu season in 2022/23, Covid-19, and missed diagnoses.

The report also noted mortality inequalities across different groups, with a 27-year male life expectancy gap between the highest and lowest boroughs, and a 21-year gap for women. It added the avoidable mortality rate for those living in the most deprived areas in England was almost four times as high as those living in the least deprived areas.

It also found potential long-term drivers of mortality could include factors such as "avoidable deaths", health-related technology advances in applications such as cancer screening, gene therapies and AI, the reduced effectiveness of antibiotics, outbreaks of re-emerging diseases, and continued health inequalities.

LCP's report said climate change was also expected to present mortality risks for DB schemes - comprising direct drivers such as air pollution and heat-related deaths, and indirect drivers such as increased transmission of diseases, damage to infrastructure, adverse economic consequences, and food supply issues. It added this could also present further geographical inequalities to mortality, with northern regions expected to see increased rainfall and southern regions to see more heatwaves.

The report advised that DB schemes may be in a good position to hedge their longevity through a buy-in or longevity swap transaction given the recent slowdown in life expectancy gains since the pandemic and estimated that buy-in pricing "is at some if its strongest levels for several years".

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However, it noted that the pricing may not reflect downside longevity scenarios, potentially leading to "regret risk". It added that with 90% of DB schemes funded on a full buyout basis, there is a risk that demand could overwhelm the market and increase buy-in pricing very quickly. 

The report continued that with the varying impact of longevity trends on different socio-economic groups, it was important to carry out scheme-specific analysis when assessing pricing.

LCP partner and head of life analytics Chris Tavener said: "After a difficult few years, it is unclear as to how much additional demand pressure the NHS can absorb without adversely affecting more lives and leading to further excess deaths.

"Post pandemic trends point towards a fall in life expectancies of up to 2% being a sensible starting point for many schemes.  Our view is that combining actuarial modelling expertise with expert judgment from healthcare professionals to have a made to measure assessment is the best way to get a full picture of shifting trends."

LCP partner and head of longevity and demographic insights Stuart McDonald said: "It's time for schemes to ditch the one size fits all approach to longevity risk and make sure they have an assumption that is made to measure for the demographics of their scheme.

"Trustees need to review how longevity risk fits into their scheme's overall risk profile and assess what level of analysis is required to make informed decisions. With many schemes seeing large improvements in funding, now is a great time to re-evaluate strategic journey options."

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