(February 7, 2012) — The rate at which people are living longer is speeding up, putting increased pressure on pension fund investors and their sponsoring companies. The Actuarial Profession used figures from the Office for National Statistics in the United Kingdom to work out that the rate of mortality slowed by 4% last year in that country. This meant 20,000 fewer people died in the UK than would have been expected, based on figures from the previous year.
Gordon Sharp of the Actuarial Profession said: “The last 20 years have seen unprecedented improvements in mortality rates, particularly for pensioners. We are able to say with confidence that the mortality improvement for 2011 has been well above the average.
“The separate improvement figures for men and women are almost identical, at 4.1% and 4.0% respectively. These compare with average rates of improvement of 2.9 % p.a. and 2.1% p.a. over the 10 years to 2010.”
Although these figures were based on the UK population, most developed nations have similar experiences. Last year, life expectancy in the United States hit an all-time high of 78 years and two months, according to the Centers for Disease Control and Prevention.
These increases put pressure on pension fund managers who have to pay benefits to members for longer than they had initially expected. This has led to the ascent of longevity swaps; vehicles created to hedge the risk of pension fund members’ extended lifetimes.
Last year some £6 billion of pensioner longevity was ‘swapped’ out in the UK through deals with investment banks and insurers in an effort to avoid falling further into deficit. Sharp highlighted that those already drawing a pension had seen the most marked improvement. He said: “It’s also worth noting that, once again, the ‘golden cohort’ of people born around 1931 has shown continued strong improvements of nearly 5%.”
Ross Matthews, Head of Mortality Research at consulting and actuarial firm Punter Southall, said that if the 2011 fall in mortality rates continued, this would equate to an increase of up to 15% on pension scheme liabilities, potentially driving deficits by up to 50%.
Ross said: “Our longevity studies show that socio-economic characteristics of members can make up to ten per cent difference in scheme-funding levels, compared with just using general population data.”
Ross said pension fund investors and their sponsoring companies should look at longevity hedging through a swap or alternative vehicle to consider their viability.