Development of the UK longevity market Rajeev Shah 9 December 2009
Dec 28, 2015
www.barnett-waddingham.co.uk
Agenda• Background
• Economic issues
• Corporate issues
• Financial issues
• Longevity Market
• Focus of longevity research
www.barnett-waddingham.co.uk
Agenda• Background
• Economic issues
• Corporate issues
• Financial issues
• Longevity Market
• Focus of longevity research
www.barnett-waddingham.co.uk
BackgroundImprovements in longevity since 1855Annual average rate of improvement in longevity
Males aged 65 – 74 from 1855 - 2005
0.0%
1.0%
2.0%
3.0%
4.0%
1855 1885 1915 1945 1975 2005
www.barnett-waddingham.co.uk
Agenda• Background
• Economic issues
• Financial issues
• Corporate issues
• Longevity Market
• Focus of longevity research
www.barnett-waddingham.co.uk
Economic issuesOverview
• Aging population• Dependency ratio increasing
– Increasing pensioner population relative to working population
• Health and old age care costs increasing– Healthy vs unhealthy life spans
• State pension costs increasing
• Increased burden on state / tax payer
www.barnett-waddingham.co.uk
Agenda• Background
• Economic issues
• Corporate issues
• Financial issues
• Longevity Market
• Focus of longevity research
www.barnett-waddingham.co.uk
Corporate issues
• Aging workforce– NRAs increasing– Age discrimination legislation introduced
• Future pension provision more expensive
• Deficit on current final salary pension scheme
• Impact depends on size of scheme relative to size of Company– Pension matters affecting commercial issues
www.barnett-waddingham.co.uk
Agenda• Background
• Economic issues
• Financial issues
• Corporate issues
• Longevity Market
• Focus of longevity research
www.barnett-waddingham.co.uk
Financial issuesOverview• Population living longer
• Increases the cost of:– Annuities purchased by individuals– Pension funds: DC – individual benefit decreases– Pension funds: DB – shortfall in funding arises– Insurance companies offering annuity benefits etc.– Benefits provided by certain charitable institutions
• Reduces the cost of:– Term / endowment assurance policies– Prepaid funeral plans
www.barnett-waddingham.co.uk
Financial IssuesImpact on annuity rates of male aged 60
• Life expectancy of male aged 60 in 2009 increased by 4 years from that expected in 1992
• Assuming interest rate of 5% p.a. and 3% p.a. inflation, £100,000 at age 60 will give an annual income of:
– £4,675 p.a. now, assuming life expectancy of 28.5 years– £5,215 p.a. should life expectancy be assumed to be 24.7 years (as projected in
1992)
• Increased life expectancy => decrease in annual income of approximately 12%
• Require an additional 1% p.a. investment return (from age 60) to achieve comparable income.
• Effect exaggerated, since interest rates fallen significantly since early 1990s => annuity costs increased significantly
www.barnett-waddingham.co.uk
Agenda• Background
• Economic issues
• Corporate issues
• Financial issues
• Longevity Market
• Focus of longevity research
www.barnett-waddingham.co.uk
Longevity MarketDrivers of longevity market• Uncertainty about future longevity
• Significant financial implications if longevity is different to expected
desire to protect against changes development of longevity market
www.barnett-waddingham.co.uk
Longevity MarketLongevity Products
• Buyout and Bulk Buyout• Longevity swaps• Other more complex products developing:
– Company taking over as sponsoring employer– Buyout, with investment strategy determined by client
who retains investment risk– Limited term cashflow cover and Funding Level
Protection
• Innovation and risk appetite helped by longevity research
www.barnett-waddingham.co.uk
Agenda• Background
• Financial issues
• Economic issues
• Corporate issues
• Longevity Market
• Focus of longevity research
www.barnett-waddingham.co.uk
Focus of longevity researchDrivers of Mortality Improvement
Law of diminishing returns at young agesChanging lifestyle
Smoking Obesity
Advances in medical technologyHeart diseaseCancersReversal of aging process
www.barnett-waddingham.co.uk
Focus of longevity research Mortality improvements for main causes of death
Source: “Exploring the Critical Path”, Critical Illness Trends Research Group
www.barnett-waddingham.co.uk
Focus of longevity research Will mortality continue to improve?
Professor Jay Olshanksy University of
Illinois, Chicago
Olshanksy argues that mortality will not continue to improve at its current
rate. The main reasons he gives are obesity, the spread of disease and, most importantly, the
existence of biomechanical limits on our lifespan.
Professor Shripad Tuljapurkar
Stanford University, California
Study assumes that lifespans increase in line with current trends until
2010, but that anti-ageing technologies would then become available that
would prolong life much further. These drugs and
therapies would cause mortality to decline five
times faster than historical rates between 2010 and
2030, before normal service was resumed.
www.barnett-waddingham.co.uk
Differences in mortality bysocio-economic class
• Mortality varies by social-economic class• Consider the following class definitions:
www.barnett-waddingham.co.uk
Longevity by social classImpact on costing
• Life expectancies of Male aged 65 (source ONS):
-Class I (Professional) 18.3 years
-Class V (Unskilled manual) 14.1 years
• Significant difference in cost of providing an annuity or a pension to the different classes
• Insurance companies and pension schemes use additional information to improve estimate of costs / pricing.
www.barnett-waddingham.co.uk
Longevity by social classExplanations for differences
LifestyleSmoking Eating habitsAlcohol consumption
WealthEducationAccess to medical servicesSocial networks
Nature of employment Injury risksLong-term health risks
www.barnett-waddingham.co.uk
Longevity by social classProxy Factors for Socio-Economic Status
Indicators of socio-economic status could include:• The individual’s occupation• The industry in which the employer operates• The individual’s salary• The amount of benefit (but there are
problems associated with using this)
The individual's geographical location (postcode)
www.barnett-waddingham.co.uk
Regional Mortality Differencesin the UK: Cold to Hot
Data Source: ONS Key Population & Vital Statistics 2003-2004
www.barnett-waddingham.co.uk
SMRs in London: Cold to Hot
Dagenham: e65 = 16.33
SMR: 105.86%
Merton: e65 = 18.81 SMR:
77.09%
Glasgow City: e65 = 16.20 SMR: 107.69%
Data Source: BW Model
but… Broomhill in Glasgow: e65 = 18.06 SMR: 84.62%