Longevity Improvements Hit the Brakes | Chief Investment Officer

Despite significant improvements between 2000 and 2011—more than three months per year on average—in the four years afterwards, there was just a four months improvement in total.

“It will reduce the deficit in a scheme that is 90% funded by 10% of that deficit.”—Hugh Nolan, JLT Employee BenefitsLife expectancy at 75 years was expected to have increased by more than seven months in that time, but in fact did not move at all.

“Insurers and pension funds will need to consider whether this recent experience indicates a fundamental change in mortality improvement trends, or whether it is a short term variation due to influences such as influenza and cold—financial implications are material,” said Tim Gordon, chairman of the the institute’s Continuous Mortality Investigation (CMI).

Hugh Nolan, chief actuary at JLT Employee Benefits, said the figures predicted a male aged 65 would be likely to live four months less than was estimated in a similar study last year.

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“This reduces the liabilities of UK private sector pension schemes by some £15 billion,” said Nolan. “While this is only 1% of the total liabilities held, it will reduce the deficit in a scheme that is 90% funded by 10% of that deficit, which can be extremely helpful for individual schemes struggling to reach full funding.”

The CMI data fly in the face of recent surges in longevity improvements—and efforts to contain its effects.

In December, the Organisation for Economic Co-operation and Development (OECD) called for policymakers to strengthen their regulations to assist pension funds and annuity providers in dealing with longevity risk. The organisation said it was a major financial issue that was not being properly confronted.

However, in 2009, a study by David Dorr, former-CEO of life settlements trading platform Life-Exchange Inc., claimed: “We are at the apex of the longevity growth curve.” Dorr set out evidence for how and why longevity increases would slow and eventually stop.

“The new tables serve as a timely reminder to trustees and employers of defined benefit pension schemes that any mortality tables are simply a guide to the future,” said Francis Fernandes, actuary and senior adviser at Lincoln Pensions. “It’s probably better to be pragmatic and reflect any step changes in the tables—good or bad depending on one’s perspective—over a period of years. This will give sufficient time to see if the revised tables are borne out in practice, noting the sponsor covenant will be there to support the impact of adverse experience.”

Scars from the financial crisis, fear of corporate investing and—of course—central bank policy have all been pulling on bond yields and keeping them low, according to research by Standard Life Investments (SLI).

In a study on fixed income, the firm’s Chief Economist Jeremy Lawson and Multi Asset Investment Director Sebastian Mackay set out what they believed to be the numerous cyclical and structural factors impacting these markets.

“Our research suggests that the benchmark US 10-year government bond yield will peak at 3% to 4% during the current business cycle.” —Jeremy Lawson, SLI“These are highly unusual times in the world of fixed income,” said Lawson. “The factors weighing on bond yields are numerous, complex, and in some cases, unprecedented.”

SLI’s analysis showed scarring from the crisis and prolonged private sector deleveraging had raised desired savings, weighing on domestic demand and inflation.

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“Weakness in domestic demand in advanced economies has been amplified by policy mistakes and this has depressed labour markets, discouraged firms from investing, and held down inflation,” said Lawson. “Productivity growth, which had been in decline even before the crisis, has weakened further, underpinned by the drought in private and public capital spending.”

Over the past five years, 10-year US treasuries have averaged 2.3%, the study said, while the country’s GDP growth has been at an average of 3.2%.

The lack of urgency shown by the Federal Reserve to raise interest rates is likely to further impact fixed-income markets and long-term rates, the authors said.

“If recoveries in the advanced economies become more self-sustaining and if emerging market economic and financial conditions do not deteriorate further, inflation expectations could pick up,” Lawson said. “The Fed should be willing to accommodate some increase in real interest rates. Investors might also demand more compensation for holding long-term interest rate risk.”

However, the authors concluded that it was unlikely that long-term interest rates would return to their pre-crisis norms.

“Our research suggests that the benchmark US 10-year government bond yield will peak at 3% to 4% during the current business cycle,” Lawson said. “This would be above today’s levels but well below the peak of previous business cycles.”

The full report can be found on SLI’s website.

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