The death of life expectancy increases may have been somewhat exaggerated

Actuaries are not known for keeping things simple, but in the realm of life expectancy assumptions we have really outdone ourselves.  Between base table scaling factors, age ratings, CMI improvements, and smoothing parameters it’s not surprising that we can face some glazed expressions when we explain the assumptions we’ve used to estimate how long pension scheme members will live.

However, underneath all this complexity there is an important debate about future life expectancy, and given that a 1-year increase in life expectancy typically leads to a 3% increase in pension scheme liabilities, it’s a debate with real-world financial impacts.

For the past five years, each annual update by the Continuous Mortality Investigation (CMI) has shown that life expectancies have not increased as quickly as expected, and companies adopting these updates have seen a reduction in their pension liability figures.  As an example, recent analysis from the CMI shows that life expectancy increases over the period from 2012-16 were only 0.4% p.a. compared with 2.8% p.a. over the period from 2008-11[1].

Given that most companies currently assume a long-term life expectancy increase of 1.25% p.a. in their financial statements[2], these headline figures, if taken at face value, could imply that there is an opportunity for companies to reduce their assumption for future life expectancies, leading to lower deficits (or larger surpluses) on the balance sheet.

As is often the case, the true picture is not that simple.  The CMI figures quoted above are for the general population of England & Wales, and when just pension scheme members are included, the CMI find that life expectancy increases have not reduced by the same extent, particularly for higher socio-economic groups.

So while this is good news for pension scheme members, finance directors who have come to rely on an annual liability reduction from updating life expectancy assumptions may need to find a more sustainable method of controlling their pension scheme liabilities.

Visit our Pensions page for more information.

[1] CMI Working Paper 115

[2] PwC benchmarking analysis

Rick Watts

Rick Watts | Financial Reporting for Pensions
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