Flu-related longevity reversal wipes £28bn off DB liabilities

A high level of flu-related deaths have pushed life expectancy projections into reverse, potentially wiping £28bn off defined benefit pension scheme deficits says Mercer.

Health - thumbnailThe latest Continuous Mortality Investigation (CMI) figures indicate life expectancy at 65 of males has fallen around 1.3 per cent while for females has fallen 2 per cent compared to last years projections. Over 65 mortality has been negatively impacted by a winter of influenza death, with a 21 per cent increase in respiratory-related deaths amongst the elderly across 2016.

Mercer says this year’s falls, following off from last year’s declines, mean insurers and reinsurers are beginning to accept that life expectancy is not increasing as quickly as had been expected.

Mortality has been on the up over the last two years. Over 140,000 people aged 65+ died in winter of 2016/17, defined as the 14 weeks ending on the last Friday in February. That compares to 126,000 in winter 2015/16, an increase of 11 per cent.

Mercer principal, innovation, policy and research Glyn Bradley says: “There’s some debate about exactly why this has happened.

“Some point to the strain in the UK’s health and care system, caught between an ageing population and budget cuts. On the other hand, this winter’s excess mortality in the UK isn’t noticeably worse than for our European neighbours. What does seem to be occurring across the northern hemisphere is that winter flu has started comparatively early, starting in December in the UK. This means the calendar year 2016 could catch significant parts of two winter flu outbreaks, rather just one. Hospital admissions, for example, appear to have peaked in mid-January, whereas in 2016 they didn’t peak until March.

“In broad terms, mortality is roughly where it was in 2011. Quite reasonably, given the dataset, the CMI’s 2016 model produces lower rates of mortality improvements than previously, particularly over the next decade. However, that’s quite short-term when it comes to pensions planning. The long-term drivers of future improvements in life expectancy remain. Medical research, application of past breakthroughs, innovative use of technology and potential for lifestyle improvements all mean that lifespans will continue to increase. When, with our partner RMS we worked through the impact of these long term factors we saw how their impact on scheme funding could dwarf any liability reductions seen in the short-term.”

Mercer partner and UK Andrew Ward, Partner, and UK Head of Risk Transfer at Mercer, added “Insurers and reinsurers are starting to factor this emerging data into their bulk annuity and longevity swap pricing and there is robust competition in the market.

“From a pension scheme perspective, this new data is still only a snapshot. It’s possible that population experience isn’t completely representative of average pension scheme membership, and some significant risks remain in a world where an extra year of life expectancy can add 5 per cent to liabilities.

“Longevity is a major risk that few schemes have addressed in any way. Managing this now won’t be the right approach for everyone. However, as a minimum, all companies and trustees should seek to better understand the risk that longevity uncertainty poses to their financial health as well as the options available to remove this risk. This is particularly relevant as schemes develop their longer term plans either for a lower risk run-off or full buy-out.”