Fewer Deaths May Mean Increased Pension Liabilities

The ongoing slowdown in life expectancies improvements in the UK over the last few years reversed course in 2019, which could lead to increased pension liabilities, according to a report from investment consultant Lane Clark & Peacock (LCP).

The firm said that based on the relatively low number of deaths reported so far this year in the UK, it expects mortality projections to show slightly longer life expectancies, therefore increasing pension liabilities.

“Following the highest number of deaths for two decades in 2018, the potential reversal in trend in the first half of 2019 may come as a surprise to some,” Michelle Wright, LCP’s head of trustee consulting, said in a statement. “It further illustrates the importance of understanding the significance of longevity risk to your pension scheme and considering taking action to mitigate against continued uncertainty when it comes to the life expectancies of members.”

However LCP said it is too early to tell whether the data for 2019 signals a rebound for stalled improvements in life expectancies for the average person in England and Wales seen since 2011, or if it is an anomaly.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

LCP’s annual longevity report analyzed recent trends in mortality, and the firm said that updating life expectancy projections for mortality trends can have significant financial implications for defined benefit pension plans.

The firm said it expects the next version of the Continuous Mortality Investigation (CMI) projections model, which is slated for publication in 2020, to produce slightly longer life expectancies.

LCP also noted there is a difference between the life expectancies improvements for the average person than it is for the average for pension plan participant. The firm said analysis suggests that the average defined benefit pensioner has experienced higher rates of improvement than those among the general population in recent years, although it added that this will vary based on socio-economic backgrounds.

Other findings from the report include:

Liabilities for a typical plan could increase 6% to 8% if major developments in cancer treatment mean the proportion of deaths due to cancer are eradicated over next 20 years.
The dominant subtype of flu, and flu vaccine effectiveness, is one of the most important factors in determining the number of winter deaths.
Many plans are exposed to higher longevity risk in their retired members than their non-retired members.
The Netherlands, Germany, France and the US are also experiencing significant reductions in life expectancy improvements since 2011.

“It is important to understand the demographics of your pension scheme members, such as their socio-economic class, in order to have an informed view of their life expectancy,” said LCP Partner Chris Tavener. “With this in mind, trustees and sponsors should consider moving to the latest model for projections and fine tune it so it is appropriate for their scheme.”

Don’t Get Too Excited over Lower Life Expectancies

Life Expectancies Are Declining Slightly in Private Pension Plans

Tags: Lane Clark & Peacock, Liabilities, life expectancies, mortality tables, Pension, UK

In anticipation of a lower return investment environment, New York is lowering the long-term assumed rate of return on investments for the New York State and Local Retirement System (NYSLRS) to 6.8% from 7%.

New York State Comptroller Thomas DiNapoli made the announcement along with the release of the state’s annual report on actuarial assumptions.

“The long-term outlook for investors is changing and requires a more conservative approach,” DiNapoli said in a statement. “As in years past, we’re taking the responsible action of lowering our assumed rate of return now so we can better weather market volatility.”

The state pension fund’s average rate of return over the past three, five, 10, 20, and 30 years are 9.32%, 7.00%, 10.34%, 6.64%, and 8.94%, respectively.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

DiNapoli also said that the NYSLRS employer contribution rates for fiscal year 2020-2021 will remain the same as the previous year for the Employees’ Retirement System (ERS), and that there will be a “small increase” in rates for the Police and Fire Retirement System (PFRS). NYSLRS is made up of these two systems.

The estimated average employer contribution rate for ERS will remain at 14.6% of payroll, and the estimated average employer contribution rate for PFRS will increase to 24.4% from 23.5% of payroll. Employer rates for NYSLRS are based on investment performance and actuarial assumptions recommended by the Retirement System’s Actuary and approved by DiNapoli.

“Each year, for the past seven years, we’ve been able to lower pension contribution rates or essentially keep them flat,” DiNapoli said. “Through solid investment returns, prudent management and a diverse portfolio we have kept the state pension fund strong and one of the best funded in the nation.”

It is the third time DiNapoli has lowered the state pension fund’s assumed rate of return. He previously lowered the assumed rate of return to 7.5% from 8.0% in 2010, and again in 2015 to 7.0% from 7.5%. According to the National Association of State Retirement Administrators the median assumed rate of return among state public pension funds is 7.25% as of February, and only 16 public funds currently have return assumptions of below 7%.

The funded ratio of the state pension fund was 96.1% at the end of fiscal 2019, down from 98.0% at the end of fiscal 2018. DiNapoli cited a June report from the Pew Charitable Trusts that ranked the state’s pension fund as one of the best funded among public pension plans. He said that only eight states had a funded ratio of 90% or higher based on 2017 data, with New York ranked behind only Wisconsin, South Dakota and Tennessee.

The retirement system also lowered its cost of living adjustments (COLA) to its minimum of 1.0%, which will be applied this month, and which is 0.3% less than the current assumption. The COLA program provides payments equal to one half of the inflation rate based on the first $18,000 of the single life allowance. There is a floor of 1% and a cap of 3% on COLA adjustments.

NY State Pension Misses Target with 2019 Return of 5.3%

New York Common Must Have 100% Sustainable Investments by 2030, Study Urges

Tags: Assumed Rate of Return, New York, New York State and Local Retirement System, Pension, Thomas P. DiNapoli