Aon Hewitt has urged pension schemes and insurance companies to interpret a new set of mortality data for the UK with caution and to remain focused on long-term trends associated with longevity risks when making assumptions about the need for risk transfer.
A new mortality projection model published yesterday by the Continuous Mortality Investigation (CMI), based on the latest deaths data from the UK’s ONS (Organisation for National Statistics), could be misinterpreted with respect to pension plan longevity assumptions, Aon Hewitt warns.
For pension plan or scheme trustees, remaining focused on longevity risk (the risk of pensioners living longer than forecast, resulting in greater than expected liabilities) is vital. Many pension schemes have taken to utilising insurance and reinsurance capacity, with longevity swaps a popular transaction structure for shifting longevity risk to those better prepared to assume it.
Global reinsurance firms are eager to assume increasing volumes of longevity risk, while at the same time the capital markets are prepared to take on some of the exposure as well. This has led to strong growth in longevity risk transfer, as pension plans realised that longer life expectancy meant their liability projections were rising.
However, this new data set from the ONS shows that 2015 has been an exceptionally heavy year for mortality in the UK to date, with more than 25,000 additional deaths than the 300,000 expected in England and Wales over the first seven months of the year.
Aon Hewitt notes that part of the reason for this could have been that last winter’s ‘flu vaccine’ was thought less effective than usual, but Aon Hewitt also notes that mortality has been heavier than expected for the remainder of the year as well.
With mortality rates up pension scheme trustees could be tempted to reduce their longevity assumptions, but Aon Hewitt warns that this could be dangerous, saying that “this data needs to be treated carefully” and noting that it encourages pensions “not to place too much weight on recent movements in mortality rates when setting assumptions for the long term future.”
Martin Lowes, a partner at Aon Hewitt, commented; “Longevity projections are key for the future planning for both pension schemes and insurance companies. However, they should not allow their projections to over-react to annual changes in the numbers of deaths as these may be caused by one-off factors rather than being part of a long term trend. Since 1995, the trend has been remarkably consistent until recently and therefore we would caution against a knee-jerk reaction based on just seven months of new data.
“ONS data has shown that mortality figures in 2012, 2013 and 2014 were also heavier than expected based on the improvement trend over the previous 20 years, and it is reasonable to take account of this – but we urge schemes to think carefully about how much weight to place on these more recent changes as against the previous long-term trend.
“Life expectancy is still increasing, just perhaps not quite so rapidly as before. We will need to see what happens to mortality rates over the next few years to help us judge the extent of this slowdown.”
It’s vital that pensions plan for longevity risk assumptions, as even if life expectancy decreases slowly, due to a kind of Moore’s law effect of diminishing returns from medical advances (and other factors) in recent years, there is still an expectation that big leaps in longevity could be achieved in years to come from technology and future medical innovation.
That could leave any pension schemes that have adjusted their longevity expectations downwards, due to an increase in a single years mortality experience, with a big hole in their liabilities in years to come.