Life expectancy is not the most cheerful of topics, but it is a critical element in investing for or in retirement. Particularly for advisers working with clients, life expectancy is a literally unpredictable event that can complicate investing.
The duration of necessary cash flows is unknown because life expectancy is unknown. In addition, longevity insurance can be unpopular with clients. Averages provide a rule of thumb but no more for advisers constructing life plans.
In the U.S., life expectancy remained fairly high at 78.74 years, as of 2015, the most recent statistics provided by the World Bank. The trend has been upward since the 1960s, but there has been a slight trend downward in recent years. In the UK, in comparison, life expectancy was 81.60 years, according to the World Bank. While UK life expectancy has also risen, recent death statistics in the UK have brought to light, perhaps a similar trend as the U.S.
An increase in UK death statistics can be concerning for longevity models, which is relied upon in the pensions industry.
For defined benefit pension schemes and the government, the cost of meeting their pension promises depends - among other things such as investment returns, inflation and regulation – on how long people live.
Longevity is a critical variable in discounting the present value of future cash flows. According to Club Vita, the longevity risk analysts, a one-year difference in life expectancy today would have five times the effect on a pension scheme’s liabilities than it did in 1990 due to the impact of lower for longer interest rates.
In 1841, when the UK’s first actuarial life table was published, the average newborn girl was not expected to see past her 43rd birthday. A newborn girl today can expect to live past her 83rd birthday. Baby boys’ life expectancy over the same period has risen from 40 years to 79 years.
Life is precious and the most basic measure of a society’s progress is its success in extending it. The gains of rising life expectancy are, in this sense, priceless.
However, longevity seems to be concerning as of late. In the Office for National Statistics’ (ONS) provisional death data for the week ending January 12, 2018 cited 15,050 deaths against the normal recent level of 13,170 for the second week in January. That is 1,900 extra deaths – 14% up from normal.
But this wasn’t a one-week blip. The same figures for the middle two weeks of December projected more than 2,000 extra deaths compared with the normal trend (an average of the five years 2011-2015). As the UK population ages and grows, one would expect the annual death numbers to rise. But not at this rate.
Death rates in 2017 were around 5% above the recent average. Indeed, life expectancy at birth has flatlined since 2011.
As Professor Danny Dorling at the University of Oxford put it: “For the first time in well over a century the health of people in England and Wales as measured by the most basic feature – life – has stopped improving.”
Life expectancy for a woman in the UK is now lower than in more than half the countries of the European Union (EU), and not only in the wealthier nations with which the UK would like to compare itself such as France, Germany - Italy but also in Greece, Portugal and Spain.
However, not all countries are going through the same situation. Life expectancy in Japan, already the country with the longest life expectancy at 83.84 years, as of 2015 according to the most recent data by the World Bank, rose by a whole year between 2011 and 2015.
The impact of these past five years of higher-than-expected UK death rates on future projections can be quite dramatic. The ONS now estimates that by 2041, life expectancy at birth for women will be 86.2 years and for 83.4 years for men. Both forecasted figures are almost a whole year lower than their previous projections in 2014.
Short-term blip or long-term change
So what has happened in the UK?
Flu epidemics are often cited as being worse than in previous periods, whether because of mutations in the virus or greater gaps in health and social care provision, as budgets have been reduced in the austerity years.
The initial spike in mortalities was concentrated among older women living alone. This is a group disproportionately reliant on such services as social care home visits, and the availability and quality of nursing homes.
A change in modeling technique might also be relevant. In reaction to a history of actuarial science underestimating future life expectancy rises, the ONS has moved to a dynamic projection that is more sensitive to recent data.
If the flatlining in life expectancy rises turns out just to be a five-year blip rather than a long-term trend, the model may eventually recalibrate.
If the flatlining in life expectancy rises turns out just to be a five-year blip rather than a long-term trend, the model may eventually recalibrate. In what are very long-term projections, statistical blips are eminently plausible. But no one can tell for sure right now.
What we do know is that the ONS is projecting that life expectancy will continue to rise across the next 25 years. This is a good thing despite recent death statistics, and even when people living longer may give advisers, governments and pension schemes a headache when it comes to deciding how to plan accordingly.
A version of this article appeared in Money Marketing on February 1, 2018.
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