David Weeks says pension schemes need to give attention to risks that flow from longevity trends.
I represent the UK in the speaker line-up at the Pan-European Pension Forum later this month in Prague. Delegates from across Europe have specially requested to hear about ‘UK Longevity trends'. What are the features of the trends? What are the implications for the UK government's pension policy framework? How do the trends impact on the governance of individual pension schemes? They know of our valued tradition in the UK for member representation in scheme governance. The Association of Member-Nominated Trustees represents that tradition.
The overall longevity trend since 1900 or so has been clear. There is a steady upward curve for life expectancy at age 65. There is also a constant stream of blips in the trend. The most recent blip comes right at the end. The life expectancy between richest and poorest neighbourhoods has widened since 2001. Prime minister May said on taking office that she would be "fighting against the burning injustice that, if you're born poor, you will die on average nine years earlier than others".
The population of the UK grows older. We see a steady increase in the percentage of the population that is aged 65 and older. In 1976, it was 14.2%. In 2016, it was 18.0%. By 2046, it is forecast to be 24.7%. More people will be eligible for state pensions.
The chancellor of the exchequer announced that the UK state pension age will be kept under review. He announced a guiding principle that people should expect to spend up to one third of their adult life in receipt of their state pension. The age will, therefore rise. Currently, it is age 65. By mid-2030s it is likely to move in stages to age 68. The full rate of state pension is now around £8,300 a year. Government policy is to increase the figure annually, and to do this by the highest of three factors - the ‘triple lock'.
UK occupational pensions have changed in recent years in response to longevity and other trends. There is the steady shift from defined benefit schemes to defined contribution schemes. The net effect of this move, of course, is to transfer the risk of shortfall from employer to employee. Government has two levers by which to control tax concessions for pensions payments: the lifetime allowance and the annual allowance. Longer life spans threw into focus the disparity between public sector and private sector pension provision. It highlighted issues of intergenerational fairness. As a spin off from that, it has highlighted some gender disparity issues. Overall, individuals will assume greater responsibility to make their own provision. Government will need to ensure that they acquire the financial awareness to enable them to do this. Recent research shows that individuals typically underestimate their life expectancies by around 10 years.
Pension scheme managements need to give attention to risks that flow from longevity trends. Prudent boards will consider the structure of their membership, with loadings based on socio-economic groups. They will hedge longevity risks with swaps. Some commentators have looked at the impact of each year of age by which a scheme underestimates life expectancy. A rule of thumb is that each year of underestimate leads to a shortfall in liability calculation of 5%. Prudent boards will keep abreast of insurance based measures: buy-ins and buyouts. They will also note that some individual scheme members build up very bog pension pots. The risks of approaches by fraudsters and scammers can become powerful. The Pensions Regulator reminds us to be constantly vigilant. These are some of the practical aspects of longevity that the UK experience will show.
David Weeks is co-chairman of the Association of Member-Nominated Trustees
The Smiths Industries Pension Scheme has secured a £146m buy-in with Canada Life in its fourth bulk annuity and its sponsor’s tenth overall.
The Prudential Staff Pension Scheme has entered into a £3.7bn longevity swap with Pacific Life Re, insuring the longevity risk of over 20,000 pensioners.
The Baker Hughes (UK) Pension Plan has secured approximately £100m of liabilities through a buy-in with Just Group.
There have now been a total of 30 longevity swaps over £1bn publicly announced. The full list, provided by Willis Towers Watson and through PP research, is as follows...
The Reckitt Benckiser Pension Fund has secured a £415m buy-in with Scottish Widows, insuring the benefits of around half of pensioners.