Chris Tavener considers the implications of a slowdown in mortality improvements for actuarial advice to defined benefit pension schemes.
The slowdown in mortality improvements since 2011 in England and Wales is well publicised, although not fully understood, with theories including ineffective influenza treatments and lack of spending on health and social care. Based on provisional data published by the Office for National Statistics to the end of June, 2018 appears to be another year with a relatively high number of deaths.
Many actuaries use the Mortality Projections Model published by the CMI (Continuous Mortality Investigation) to estimate life expectancies and manage the finances of DB pension schemes. The latest survey from the Pensions Regulator indicates 19 out of 20 DB schemes use this model. The most recent version, CMI 2017, was published in March 2018, and calibrated using mortality data up to the end of 2017. What can we expect for the next model, CMI 2018?
Potential outcome
The CMI has calculated that, for the CMI 2018 'core' model to give the same life expectancy at age 65 as the 2017 version, mortality rates would have to reduce by 4%-5% from 2017 to 2018. It seems the opposite is panning out - even allowing for an increasing and ageing population. The 2018 model could thus result in life expectancies being 1%-2% lower than those calculated using the 2017 version.
The CMI Model smooths fluctuations in mortality rates over time, and, although not specifically designed to, smooths transitions in trends. It allows actuaries to move away from the core parameters and choose the smoothing parameter, for example to vary the sensitivity to which the model reacts to new data and trends - perhaps reflecting views on how the drivers for the slowdown in mortality improvements in the general population applies to the members of their pension schemes. The impact of incorporating experience for deaths in 2018 will be lower for those which allow for more smoothing, but the impact may last or emerge for longer.
Some implications
Updating projections for this trend in falling life expectancies can have financial implications for running a pension scheme:
De-risking:
- Targets to reach self-sufficiency may be closer than thought
- Decisions around proceeding with a buy-in can be affected, as mortality updates can influence perceived 'value for money'.
Investment:
- Schemes may be more hedged than expected, if originally calibrated to cashflow projections reflecting longer expectancies
- Triggers for reallocating assets to a matching portfolio may be hit if linked to an improving funding level due to lower life expectancies, thereby accelerating de-risking.
Scheme funding:
- Deficit contributions from scheme sponsors could be reduced, or recovery periods shortened, by 5%-10%, based on an average funding level of 85%
- Unintentional prudence could be accumulating in the calculation of technical provisions if the improvement assumptions haven't been updated.
Member options:
- When next reviewed, transfer values may be reduced, and the terms for pension increase exchange exercises may be affected.
Looking forward
We cannot be sure if the trend in mortality rates will continue, but the structure of the CMI core model has inherent smoothing built in. This results in a lag on reflecting new data, leading to some momentum. Consequently, future updates to the model may continue to lead to annual falls in life expectancies as the latest data feeds in, unless we see a reversal in the trend.
A key question for actuaries is to what extent they should provide advice anticipating the direction of travel for CMI 2018. Helpfully, the CMI will be providing quarterly updates to aid such deliberations.
Chris Tavener is a partner at Lane Clark & Peacock