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Life expectancy headlines – fact or fiction?

A look under the bonnet can reveal more to recent news stories

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By Stephen Caine | April 19, 2017

A look though recent headlines relating to life expectancy, separating the truth from the 'alternative facts'.

Life expectancy has been hitting the headlines in recent weeks. It is good to see these issues getting public attention  increased awareness can help members better understand their own pension scheme. However, as we’ll see, the news is not always as revealing or accurate as it may seem. In this briefing, Stephen Caine looks through some of the recent headlines and separates the truth from the 'alternative facts'.

Let’s start with John Cridland’s recent review of State Pension age (SPA) – this is the first of many reviews into the age at which future pensioners will receive their state pension. These reviews must be carried out at least every six years, but are expected to be carried out every five years. The review considers life expectancy with the aims of promoting affordability, fairness and fuller working lives. Headlines at the time highlighted that SPA was set to increase and could eventually rise to 70. Whilst true, it left this author feeling like it was stating the obvious but also missing the point.

The report sets out a proposed schedule for future rises in SPA, after it reaches 67 in 2028 – suggesting that the first such rise to 68 should occur by 2039, and that an increase every 10 years thereafter “represents an appropriate pace of change for the future.” Under this schedule, SPA will indeed hit 70 eventually, possibly by 2059, i.e. affecting those who are around 28 and under now.

So why did I think the headlines were stating the obvious? Because under plans first set out by George Osborne in 2013 (which Cridland’s review falls under), SPA was already set to increase with reference to increasing life expectancy; the idea was to keep the share of adult life that retirees could expect to spend in receipt of State Pensions below one-third. What most news organisations missed was that the schedule proposed by John Cridland would see the SPA reach 68 faster than it would now be expected to get there under Osborne’s formula (2041 – using the same one-third principle) – but less quickly than under the timetable that Osborne’s formula had been originally expected to produce (2036).

In recent years, life expectancies have not been improving as expected (more on this later). The latest version of the ONS’s population projections, which the Government had committed to use in SPA reviews, assumed that people will not live as long as previously expected, reflecting an uptick in death numbers over the last few years.

Reacting to this, the Government said in November last year that it might tweak the formula. This change would see SPA reach 68 in 2030. So Cridland essentially concluded that the original formula was too generous (2041), while the alternative was too harsh (2030) – and hence, that SPA should rise a bit faster than it was supposed to, although a lot less quickly than some in the Government might like it to.

By law, the Government must report to Parliament on its intentions before 7 May. That will be before the ONS releases updated projections later this year. Recent evidence suggests that its assumptions about how long people can expect to live will be revised down again. That aside, other elements of Cridland’s review were largely reported on accurately, including the dismissal of a variable or flexible retirement age (too complex and creates further issues) and that the “triple lock” on indexation should be abolished in favour of a straightforward earnings link (it appears that the Government has been ‘rolling the pitch’ for an announcement on this in the next Spending Review; Cridland positioned it as a way of avoiding an even faster rise in the SPA).

Moving on to other stories, most news organisations recently ran two different stories which could have confused their readers. Firstly, world headlines in February claimed that people born after 2030 could live, on average, to beyond 90, based on a scientific study carried out in the UK. Whilst good news, the sting in the tail for the UK is that we only came 21st in terms of the projected life expectancy at birth in 2030 for women, with men faring slightly better at 14th (roughly where the scientists found we stood in 2010).

What could have confused UK news watchers were the headlines a month later, in March, that UK life expectancy has fallen. We have all got used to people living longer than past generations, so the news that there had been a reversal certainly got noticed. Indeed, Jeremy Corbyn was so alarmed by the news, that in April he was in the headlines for citing it in a local election campaign launch as proof that the Government is failing us all. The Conservatives disputed Mr Corbyn’s premise, and said that life expectancy is not falling.

The source of this controversy was the release in late March of the latest life expectancy projection model by the Actuarial Profession – the “CMI_2016” model. The analysis revealed that 2016 had been another relatively heavy year for UK death rates. Whilst lighter than 2015’s really bad year, death rates were still elevated above other recent years. The longevity improvements that we take for granted have stalled now for around five years, creating a hot topic within the profession about whether it is a longer-term result of underlying factors (lifestyle, health spending etc) or just a temporary “blip”.

The result of another year of heavy mortality (and some modelling changes) is that future mortality rates are now projected to be heavier than the previous model had suggested they would be. This reduces projected life expectancy by four to six months for a 65 year old. In that sense, Labour is right: projected life expectancy is lower than it was. But future 65 year olds are still projected to live longer than today’s 65 year olds; in that sense, the Tories are correct.

The implications for pension schemes are two-fold. Schemes undertaking an actuarial valuation this year and adopting the latest mortality model will see a reduction in their liability value, possibly by 3% to 4 % – good news for those struggling with deficits. The complication is that the outlook for future improvements is perhaps more uncertain than any time in the last decade. After a period of fairly easy times when setting a mortality assumption, trustees and sponsors may find themselves revisiting their allowance for future improvements and scratching their heads over the correct assumption to make.

Given the increased uncertainty, trustees and sponsors will be looking for new ways to understand their scheme’s mortality. One option now available is to better understand your scheme members’ own characteristics. Our medical underwriting service uses our Pulse Model to paint a biologically plausible picture of a scheme’s mortality, based on members’ current health status and views on the outlook for each major disease type informed by medical experts. Such a medical or disease-based approach is more detailed and avoids the pitfalls of extrapolating past trends. Another option – using stochastic techniques – allows trustees and sponsors to explore the possible variability in a scheme’s future mortality outcomes. This enables a better understanding of longevity risk, the level of uncertainty in a scheme’s assumptions, the materiality if it goes wrong and the effectiveness of longevity hedging solutions. We see these approaches playing a much greater role in pension scheme governance going forwards.

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