A decade of smooth and relatively high rates of longevity improvement has shaped the pension industry over the past two decades and has become embedded in longevity reinsurers’ pricing models. However, mortality experience since 2011 increasingly suggests that there has been a sea change in the underlying trend, with much lower than expected improvements currently emerging.
Tim Gordon, partner & head of Longevity in Aon Hewitt’s Risk Settlement Group, said: “Mortality improvements in the UK have been much lower than expected over the past five years, averaging just 1% per year for males, compared with 3% per year in the first decade of this century. This is the most extreme reversal in mortality improvement trends seen in the past 40 years. What was initially assumed by many actuaries to be a blip is increasingly looking more like an earlier-than-expected fall-off in mortality improvements.
“The industry is currently trying to digest all the implications of this emerging information and – inevitably – it is taking time to feed through into insurance and reinsurance pricing.”
Martin Bird, senior partner & head of Risk Settlement at Aon Hewitt, said: “While there remains a strong appetite across the industry to manage pension risk, with a particular focus on tackling the uncertainty relating to life expectancy, there is now a potential price dislocation in the market. If insurers and reinsurers are pricing using out-of-date mortality assumptions, schemes could be in danger of transacting on poor terms. Unlike a bulk annuity, a longevity swap is all about longevity – a consensus view on best estimate life expectancy is a critical component of a functioning and competitive market.
“If schemes are not confident that pricing is up-to-date and that the deal makes financial sense, they should consider delaying until the market corrects. The situation is not unlike where petrol station forecourt prices take time to adjust when the price of oil falls. But – unlike motorists having to refuel their cars – pension schemes can choose when to buy longevity insurance.”
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