Pensions World

Catherine Love-Soper, Barnett Waddingham, considers the impact of genetic testing on life expectancy and the consequences for pension schemes

One hundred and fifty years after Charles Darwin first put forward his theory of evolution, the Human Genome Project and its successor, Hapmap, have identified every human gene, along with the sequences of all the three billion DNA “base pairs” in the human genome. The potential implications of this “gene revolution” for medical advancements and life expectancy are staggering and should have a positive impact on people’s health and hence life expectancy.

The financial impact, however, could be huge and, in particular, the future for pension schemes may be less rosy – within the next decade genetic testing will increase further the cost of defined benefit (DB) schemes and lead to a reduced retirement income for those in defined contribution (DC) arrangements.

Mind blowing potential

So, given the standards of modern medicine, why does the science of genetics have such mind blowing potential to increase life expectancy? Well, for example, it will facilitate the development of “targeted” medicine that can improve how tumours are treated, or allow the tailoring of medicine to ensure that people receive the treatment that is most appropriate for them. This is surprisingly important as currently the fifth main cause of death in the USA is an adverse reaction to prescription medicine.

But it is the impact of people’s increased self-awareness – the knowledge of their own genetic profiles – on lifestyle choices that will bring about the real benefit. In simple terms, genetics only tends to account for around 25%–30% of life expectancy, with lifestyle factors being far more influential and accounting for the other 70%– 75%.1 Pension scheme members identified as high risk for cardiovascular disease (CVD), for example – the leading cause of mortality in the UK – might stop smoking, eat less fatty food and do more exercise as a result of better self-awareness. At the very least, they will be strong candidates for a course of cholesterol lowering statins recommended by their doctor.

Another strong reason why this will be so influential is that the cost of genetic testing has already fallen 10,000 times2 and the test is now relatively easy to perform. For example, UCL’s “StoreGene” initiative provides genetic risk profiling for people at risk of CVD through a non-invasive cheek swab that can be submitted remotely for testing. The results will show whether you are more or less likely than an average person to develop CVD and, more importantly, your absolute risk of developing the disease. This suggests genetic testing could significantly impact on risk profiling within the next decade.

Genetic testing should also be useful much earlier than current diagnostic approaches like CT scans, MRI scans and ECGs. These techniques identify high risk individuals by scanning for physical damage to the heart or a build up of plaque, but some people with CVD can go years without developing any symptoms. UCL claim that a genetic test can identify an individual who is at high risk before any symptoms surface, which means people can take action early and change their lifestyles.

What will happen?

In 2009 the first ever longevity swap with a UK pension scheme was written in respect of the Babcock Pension Scheme pensioners; and, more recently (2011) the Pall (UK) Pension Fund completed the world’s first longevity hedge for non-retired members. While this reveals a maturing interest among pension schemes for quantifying and hedging against longevity risk in financial management, schemes still do not make use of the best tools for determining the life expectancy of their members. Current analyses tend to be based on (some combination of): scheme experience (which is naturally weighted towards older pensioners); members’ pension sizes; or postcodes. Trustees do not generally ask members to reveal their smoking status, blood pressure or cholesterol, even though these are some of the strongest available longevity indicators.

Knowing about members’ genetic profiles and lifestyle choices could provide trustees and sponsors with a much clearer picture of how long their members could live. So the question is: what will happen in the era of genetic testing?

All that glitters … for members

If people can use genetic information to maximise their life expectancy, DB pensioners may have longer in which to enjoy their defined benefits.

The financially savvy members could use their genetic information to tip the balance with regard to member options and allow them to select against their scheme. For example, non-pensioners categorised as very high risk, who do not have the time or the inclination to change their lifestyle, may exercise their individual right to transfer out of the scheme to boost their retirement income through purchasing an impaired annuity or to maximise death benefits payable to dependants, leaving the more genetically advantaged members behind in the scheme. Similar pensioners could also be more likely to take up a Pension Increase Exchange offer, where they exchange their non-statutory pension increases (typically on pre-97 pension elements) for a one-off uplift to their current pension, leaving those pensioners with longer life expectancies in the scheme.

Equally, such information could also help non-pensioners make the best decisions on how much pension to commute for cash at retirement and perhaps even affect decisions regarding early or late retirement.

Inevitably genetic testing will be bad news (financially speaking) for younger and prospective members of pension schemes.

Improvements in life expectancy will cause many sponsors to reduce members’ benefit levels going forwards (eg reduced future accrual rates or increased retirement ages) or raise members’ contributions. At worst, it will be the final straw leading to yet more DB scheme closures.

Is not gold … for sponsors

A better understanding of life expectancy might, at first, seem like good news for DB scheme sponsors, who can use unprecedented levels of certainty to fund more accurately and with greater confidence. But members may not be willing to disclose such information to sponsors and trustees, even where benefit levels are unaffected. This would be a particular issue for sponsors of small schemes where a few key individuals may account for a significant proportion of the liabilities and hence represent a significant risk of outliving the statistics.

Sponsors of schemes with significant numbers of members who are more genetically vulnerable than average might think they could benefit from cheaper buyout or longevity swap deals from insurance companies, or realise savings on their funding commitments. But, as discussed earlier, genetic testing is very likely to highlight risk profiles in plenty of time to alter the most significant lifestyle factors and tackle the potential early onset of life threatening diseases.

So, while it is obvious that any medical advance improves average life expectancy, the effect of uncovering genetically less fortunate members is subtle but still likely to be costly.

Expensive dilemma

Overall, people with DC arrangements are the individuals who are at most risk of losing out financially. As life expectancies increase, annuity prices will rise meaning that your pot at retirement in a few years’ time will buy you a smaller pension than it could today. For men this will compound increases to annuity rates to reflect the requirement for sex equal rates from the end of 2012.

The potentially expensive dilemma that members who want to know their genetic profile may face is whether they could be compelled to reveal this information when purchasing an annuity. It is currently illegal for insurance companies to force a customer to undergo genetic testing but, as this becomes more commonplace, the position could change.

One advantage of genetic testing for individuals who have to fund their own pension provision is it could help them with planning how much life insurance to take out, determining how much to save for retirement and in decisions regarding when to retire and whether to annuitise or take advantage of income drawdown following the recently removed requirement of compulsory annuitisation at age 75.
Having said this, perhaps in reality only actuaries would go to such lengths!