Don’t Get Too Excited over Lower Life Expectancies

Life expectancy at birth has fallen for the second straight year, according to data from the National Center for Health Statistics (NCHS). And while it’s unlikely anyone would want to celebrate that, this can often be seen as a boon for pensions because it typically means reduced costs.

However, Segal Consulting says that life expectancy is still improving for those who have reached retirement age, and that pension plan actuaries should not reverse expectations for mortality improvement.

By law, funding for single-employer pension plans is based on mandated Society of Actuaries (SOA) tables and projection scales that are based on mortality data for private sector workers. While lower life expectancies typically mean lower costs for pension plans, Segal says it’s not so cut and dry, as there are many nuances to consider.

“For professionals who study population statistics, like actuaries and demographers, there are subtle but significant differences between life expectancy, longevity, life span, and mortality,” said Segal’s report.

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Life expectancy is the result of a calculation that estimates the average number of years until death at a specific age, while longevity and life span are less specific terms that refer to an estimate of how long an individual might live. Meanwhile, the mortality rate is a ratio of the actual number of deaths to the size of the total population for a specific age or age group.

“Despite these differences,” said the report, “the media tends to use the terms interchangeably to refer to the estimated number of years until death.”

However, between 2015 and 2016, death rates increased significantly for those under 45, while death rates decreased for those older than 65. Additionally, an analysis by the SOA confirmed that although the life expectancy for newborns decreased based on the NCHS study, the overall age-adjusted mortality rate in the US improved, albeit by less than 1%.

“The recent mortality rates observed for the retired population continue to support expected improvements in life expectancy for this group,” said the report. “Therefore, it is important for actuaries of multiemployer plans not to reverse their expectations for mortality improvement in response to the latest data.”

Segal also said while refinements may be necessary in the actuaries’ assumptions for pension plans, they should be based on longer-term trends.

“There has indeed been a trend of lower improvement over the last several years even at the older ages, but we should be cautious about setting long-term assumptions based on shorter-term trends—even when those trends last a decade,” said Segal. “It is too soon to tell whether longevity for the retired population will continue to improve at high rates.”

Tags: actuary, life expectancy, National Center for Health Statistics, Statistics

The University of California Regents Chief Investment Officer Jagdeep Bachher says he sees the university taking steps soon to de-risk its commodities portfolio, transferring investments away from oil and gas funds.

Student and environmental groups have been pressuring UC to stop all fossil fuel investments in its $11.5 billion endowment, $66.6 billion pension, and other investments pools, a move that has been resisted by university officials.

The comments by Bachher would potentially affect a smaller group of securities since the university’s commodities portfolio exposure to oil and gas investments is much smaller than the university’s equity investments in those areas.

“I can see a point in the near future where we will start to fundamentally reduce those assets,” Bachher said of oil and gas commodities investments, as he spoke at a Regents Investments subcommittee meeting in Los Angeles on Tuesday.

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Bachher also made it clear that there will be no new investments in oil and gas-related commodity funds.

Money managers and hedge funds have made bullish bets on oil futures this year, a move that Bachher believes is too risky over the long term.

“We have to believe based on where the commodities are trading at, in the long term, investing in fossil fuels and putting in money today, and locking that money up for a decade, and underwriting a particular price of oil is just a financial risk that we do not want to take in the context of real assets,” he said.

Bachher said oil and gas assets could be transferred to other investments such as infrastructure and energy-generation investments, which could include transmission lines.

Bachher told CIO after the meeting that the university’s oil and gas commodity holdings are less than $500 million. He did not elaborate on how quickly assets could be transferred away from commodity funds that can require a lock-up of money for as long as a decade.

“I am not a big fan of investing in fossil fuels in a private sense going forward, and, for that matter, in a public sense because of the financial risks attached to it,” he said.

The potential move to reduce commodities exposure in the oil and gas arena does not affect oil and gas holdings in the university’s index equities. Those holdings are estimated at more than $3 billion.

In a joint statement in June 2017, Bachher, Richard Sherman, chairman of the subcommittee on investments, and Amy Myers Jaffe, senior advisor, energy and sustainability in the office of the CIO, said the university was committed to investments in cleaner energy initiatives but resisted calls for divestment of all fossil fuel holdings.

Bachher’s office has invested in several clean energy funds and has also divested around $200 million in stock from coal mining industries and oil companies focused on tar sands.

Tags: Commodities, De-Risking, Endowments, Jagdeep Singh Bachher, University of California