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10

Global team of actuaries identifies five principles to tackle 'time bomb' of longevity risk

Open-access content Friday 23rd October 2015 — updated 5.50pm, Wednesday 29th April 2020

A team of actuaries from the UK, US and Australia has identified five principles when managing the risk of people running out of money in retirement, according to a report.

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Actuaries in the UK, US and Australia worked together on the project because longevity risk is not "well understood" and it has "significant implications" for retirement income.

The UK's IFoA, the American Academy of Actuaries and the Actuaries Institute Australia joined forces to compare retirement income systems in their three countries and highlight the five principles, which are adequacy, information, flexibility, equity and sustainability. 

The organisations found the shift from defined benefit schemes to defined contribution schemes had moved responsibility for managing risk onto the individual. 

A report said making adequate savings was crucial and people needed to understand and define an "adequate income" so they can plan accordingly.

People also needed information on saving not just at the point of retirement, but leading up to and beyond it.

Regulation should be flexile to reflect individuals' different retirement needs and their "varying capacity to exercise choice", said the report.

Governments and regulators should also ensure the retirement system is "fair". "For instance, governments and central banks need to be mindful of the impact of monetary policy on products that lock into the current interest rate environment," said the report.

Concerning sustainability, the report said changes in the pensions market should focus on the longer term and not encourage "tinkering" with existing systems. 

Fiona Morrison, president of the IFoA, said: "Research shows that individuals tend to underestimate how long they will live, which could cause both individual financial hardship and an increased burden on the benefit system. Access to adequate financial advice will be vital for savers to understand all their options and the risks of the choices they make.

"It is important to encourage people to save and make choices at retirement that can lead to a sustainable income. With the pensions freedoms that have come into effect in the UK recently, which allows pensioners to spend their retirement savings as they wish, the issue of longevity risk is a ticking time bomb."

Ken Hohman, international secretary of the American Academy of Actuaries, said: "Longevity risk is not well understood by many people, and this lack of awareness can have significant implications for retirement income. 

"We hope to bring attention to longevity risk and ways to address it, and to examine public policy approaches to improve lifetime income options for a secure retirement."

This article appeared in our October 2015 issue of The Actuary.
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