Dangerous message?

The Regulator’s proposals regarding pension schemes’ need to increase their longevity estimates are at risk of giving off a highly inappropriate and potentially dangerous message – “one size fits all”.

All schemes will experience different levels of longevity improvement. We believe that the Regulator should be doing far more to help trustees understand the nature of the longevity advice they receive from actuaries. There are four “golden rules” which actuaries should follow when advising clients on longevity issues:

Know your limitations: longevity assumptions comprise two elements: the rate at which pensioners are currently dying, and how these rates will improve in the future. The former can be measured fairly accurately, but the latter is far more subjective. It is vital that trustees understand this.

Use a common language: actuaries must avoid technical jargon whenever possible. (Longevity assumptions should always be described in terms of expectation of life.)

Keep it real: longevity will only improve through medical advances and lifestyle changes. Statistical projection has to be supported by realistic expectations regarding developments in cardiac medicine and cancer treatment.

Don’t be blinkered: there is no definitive answer and the future is highly uncertain. Good longevity advice must illustrate this uncertainty by showing a range of possible outcomes and their likely effect on a scheme’s finances.

The danger of imposing a minimum trigger on improvements, as the Regulator has proposed, is that this will become a default assumption which trustees will follow blindly without considering the demographics of their scheme. This is not what scheme specific funding is meant to be.

Steven Baxter
Longevity Consultant
Hymans Robertson LLP