Longevity pooling will minimise risk

The growing gap in life expectancy between rich and poor will rapidly increase the rate of scheme liability growth, a raft of data shows.

Prudential is currently working on a deal for one scheme – which pays around 15% of its total benefit to fewer than 2% of its members – in which it will buy out only its top-paid employees.

Meanwhile research from Legal & General’s Longevity Science Advisory Panel reveals life expectancy is increasing ever more rapidly in higher socioeconomic groups.

The average annual rate of mortality improvement is around 3% on average for under-65s in the most affluent sections of society, compared with fewer than 2% for the poorest.

And because schemes’ liabilities are centred around these highest socioeconomic groups, the cost of providing pensions will start growing at a faster rate than currently, on the back of these projections.

Andrew Gaches, longevity consultant at Club Vita, said: “Pension schemes need to be very careful when they’re considering what data to look at to access the trends.

“If the pension schemes make projections on the UK average trends when in fact it is for trends among the highest socioeconomic groups that matter, then there will be shortfalls in their funding margin as a result.

“The sooner the pension schemes look at the most relevant evidence, the sooner they will ensure they have accurate cost projections.”

David Evans, director of innovation at Prudential, said pension schemes should pool such individuals separately to account for the sharp increase in longevity.

“If high net worth individuals live to age 90, it could create a big hole in the funding of that pension scheme,” he added.

Evans claimed the insurer’s new derisking product aimed at high net worth individuals, is designed to remove the risk to pension schemes posed by the increased longevity of those in the top pay brackets.

And the L&G report’s author, Sir Derek Wanless, said: “Much of the recent forecasts about improvements in life expectancy have been wrong.

“They have incorporated an assumption that we would begin to see falls in the rate of improvement in life expectancy but the opposite has occurred…

“Despite the efforts of successive governments to narrow the gap, differences in life expectancy by socioeconomic group have  continued to widen.”