Tell us about your background and how you got to where you are now.
I was a student at the London School of Economics in the 1970s and 1980s. When I finished my degree, I was offered a job as a research officer in the economics department under the direction of professor (now Lord) Meghnad Desai. I did a part-time MSc and then thought about a PhD. I was interested in institutional investment behaviour and decided – under Meghnad’s supervision – to focus on modelling pension fund investments.
I have never looked back. When I mention my area of interest to people, their eyes soon glaze over. However, I find it a fascinating mixture of economics, finance, actuarial science, behavioural science, accounting, law and demography.
After my PhD, I was fortunate enough to get a research job at London Business School and then a lectureship at Cass Business School, before being promoted to a professorship.
What is your current role?
I am the director of the Pensions Institute at Cass Business School. When I established the institute in 1996, it was the first academic research centre in the UK to be devoted entirely to pensions research and the first to be set up outside the US.
I was one of the first people to recognise the multi-disciplinary nature of pensions. Prior to that, the various groups of pension professionals – actuaries, accountants, lawyers – had worked in silos, used their own language, and barely communicated with each other. Actuaries were the worst offenders here. When I first came across actuaries in the early 1980s, I found them to be very territorial. Some were actually quite hostile. Their attitude was: ‘Pensions is our area, what are you doing here?’ Things are much better now.
What are your main day-to-day activities at work and current research interests?
My day is dominated by emails – oh, the tyranny of email! The first thing I do is read all the pension newswires. Then there are requests from journalists and others seeking pension information. In term time, there are lectures to give and students to mentor. Finally, there is email correspondence with my research collaborators, most of whom are based outside Cass in locations ranging from San Diego to Melbourne.
My current research interests include multi-population stochastic mortality modelling, longevity risk hedging, basis risk modelling, the securitisation and tranching of longevity risk exposures, the design of default funds in DC schemes, applying the lessons of behavioural economics to improve retirement expenditure decisions, and pension fund investment performance.
What longevity-related challenges do annuity and pensions providers face, and how well placed are UK providers to deal with these?
The main challenge lies in getting a good fix on the trend improvement in longevity, that is, the systematic component to longevity risk. The extent of exposure to systematic longevity risk faced by annuity and pension providers has compelled them to take on investment risk in what should not really be an investment risk business.
The provision of an annuity or pension after retirement is really a cash-flow matching exercise. But without longevity bonds to hedge systematic longevity risk, annuity and pension providers have needed to assume some investment risk. We have yet to see the long-term consequences of this.
The UK is no better placed than anywhere else to deal with the problem of longevity risk. However, we do have one advantage in that we have started to recognise the existence of the problem. Other countries – particularly the US and its actuaries – are currently in denial.
Is there enough collaboration on longevity-related research between academia and industry, and what areas of research would you like to see developed?
A team from the Pensions Institute – Andrew Cairns, Kevin Dowd and myself – began a programme of research with investment bank J P Morgan in 2007. We developed the LifeMetrics indices and wrote some very well received academic papers, which were given free to the rest of the industry.
Other industry players used our work, but sadly they offered nothing in return: we were offering cooperation to help establish the life and longevity market, but it seemed virtually everyone else merely looked to their own competitive advantage.
Following the credit crunch and the Dodd–Frank Wall Street Reform and Consumer Protection Act of July 2010, it had become too capital intensive for the investment banks to remain in the industry and the research collaboration came to an end. But the fundamental problems we were trying to solve still remain. There is insufficient capacity in the insurance and reinsurance industry globally to shift $25trn of longevity risk exposure out of corporate pension plans. Capital market solutions are needed. That requires us to continue working on index hedge effectiveness and basis risk modelling. It also requires much more transparency in the pricing of deals. More work needs to be done on the design of longevity-linked capital market instruments to better suit the needs of end investors: this involves finding the best way of securitising and tranching longevity risk exposures.
How can the government best deal with the increasing challenge of providing an income in retirement for future generations?
We have auto-enrolment just starting, so the first thing the government needs to do is to insist that the default investment funds into which 90% of members will invest are well designed and offer good value for money.
A key indicator of good design would be reliable and predictable outcomes in terms of the pension received in retirement: two people making the same contributions for the same period should not end up with wildly different pensions. Success will also depend on having low and fully transparent costs and charges.
The second thing the government needs to do is to get people to save more towards their pension to avoid poverty in old age. There are useful lessons from behavioural economics, which we are looking at applying to both the accumulation and decumulation stages. Otherwise, the only alternative is that in the future people will have to work much, much longer than the current generation.
The third thing is for the government to recognise that it has a very important role to play in facilitating inter-generational risk sharing. It can do this by issuing longevity bonds, which would help with the pricing transparency issue mentioned earlier and help to reduce the investment risk that providers are now taking to compensate for the systematic longevity risk they carry.
How long do you think it will be until living to 100 will become the norm, and what do you think the main drivers behind this might be?
Demographers are predicting that a large proportion of people being born today will live to be 100. The main driver will be medical science – who knows what breakthroughs we will witness in the next 50 years? There are still concerns about obesity, food, water and energy shortages, environmental degradation, pandemics and wars, but none of these seem capable of slowing down the inexorable and amazingly rapid increase in life expectancy that we are currently witnessing.