Pensions - Articles - Fall in winter death rate shows longevity risk to pensions

 The spike in deaths in winter 2014/2015 was driven by a winter flu outbreak. While there was also a winter increase in flu cases (and higher-than-expected deaths among working age adults) in 2015/2016, it doesn’t appear to have been on the same scale as the previous year. Mercer also found that the number of deaths registered over the twelve months to May 2015/2016 appears to be around 12,000 lower than for the same period in 2014/2015. In particular, early data suggests there were 17% fewer deaths registered for the over-85s in the period between December 2015 to February 2016, compared to the same period the year before.

  

 Glyn Bradley, Principal in Mercer’s Innovation, Policy and Research team commented, “Mortality rates are much more variable than most people realise and “good” and “bad” years tend to alternate. It’s important not to read too much into short term trends; in mortality, even a few years’ data counts as short-term noise and only over a period of many decades can meaningful trends be drawn. It would have been premature to conclude last year that the years of big mortality improvements were over. Initial data suggests a partial rather than complete reversal of last winter’s increased mortality but, if we do see a big improvement in mortality rates this year, it does not mean life expectancy is about to sky rocket.

  

 Fundamentally, however, life expectancy remains hugely uncertain and how long people actually live for depends on a series of random events.”

  

 Andrew Ward, Partner and Head of Longevity Risk Management at Mercer added “Longevity risk is a significant risk for defined benefit pension schemes, and one that to date has been largely unhedged despite being deemed unrewarded.

  

 Many commentators suggested that the increase in death rates in 2015 along with concerns such as austerity, obesity and antibiotic resistance meant that the trend of continuing increases in longevity that have been experienced over the preceding decades was coming to an end. However, there are also a number of counter arguments such as potential new cancer treatments or the impact of the "sugar tax" introduced in the recent Budget. These new figures illustrate that the range of potential outcomes can be greater than is often recognised which makes setting assumptions challenging.

  

 Ward continued, “The good news is that there continues to be innovation to increase the range and efficiency of options to manage this risk. For example, “captive” or “pass-through” structures can reduce costs and increase flexibility in longevity swap transactions for larger schemes while streamlined solutions have become available for smaller schemes – illustrated by the completion of a longevity swap with Zurich in respect of approximately £90 million of liabilities as announced by Mercer in December 2015. Similarly, the medically underwritten bulk annuity market is growing and can potentially offer attractive pricing and the ability to “top-slice” liabilities for members with the highest liabilities.”

  

 Ward concluded, “Given the inherent uncertainty in future longevity, we recommend that schemes and sponsors at least consider managing this risk even if it is ultimately decided that no immediate action is required.”