You and I are gonna live forever”
Noel Gallagher, Oasis
Whilst we know that, for the foreseeable future at least, nobody is going to live forever, the increasing rate at which the population is living longer is a serious concern for employers with Defined Benefit (DB) pension schemes. As scheme deficits continue to rise, if any member of a DB scheme outlives their life expectancy by just one year, it could feel like forever to those responsible for meeting ongoing pension commitments. How can employers tackle this?
DB pension schemes face the risk that the investment performance of their fund will not be enough to meet their promise to pay employees a monthly pension based on their earnings history, length of service and age. This is then compounded by longevity. Today’s pensioners are living longer than their historic counterparts and this continues to be an upward trend, meaning payments may need to be made for longer than originally anticipated.
Life expectancy at older ages continues to increase meaning our pensions need to last longer.
Life expectancy at age 65, England and Wales, 1841 - 2011
Source: ONS (click for interactive version)
This goes some way to explaining how 4,095 of 5,020 DB schemes were in deficit at the end of July 2016 (Source: The Pension Protection Fund, 2016). There is good news in all this though. The risks to companies operating DB pension schemes can be managed and a strategy to do this must form an integral part of a business’ risk management policy.
Remove, Reduce or Retain?
While some risk, such as investment risk, rewards the risk-taker with the potential of good returns, no such reward exists for DB scheme longevity. Longevity is an unrewarded risk that a business can choose to remove, reduce or retain in the following ways…
With ever increasing life expectancy, the issue of longevity risk is not going to subside any time soon. Combined with low interest rates, the threat of under-funding is real and there is no one-size-fits-all solution.
As part of a broader range of pension scheme, auto-enrolment and employee benefit services, Courtiers can help businesses to identify and plot the best course of action depending on the size and nature of their DB schemes and future strategies and objectives.
Vanessa Clayton BA, DipFA, MLIBF, CertPMI
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