Much of what advisers do in terms of financial planning involves an assessment of and planning for the different stages of a client’s life. Until recently, the assumption was that life expectancy was on an inevitable upward trajectory with implications for individual clients and indeed business planning.
Recently however, the Office for National Statistics (ONS) has sounded a warning note suggesting that we can’t necessarily take this upward trajectory for granted.
In a report published in June, the government statistics authority addressed what it called “a statistically significant slowdown in the long-term improvement in age-standardised mortality rates for England and Wales” which took place around the early 2010s.
It added this was true for England and Wales, for both sexes, and for older and younger people. The report did not cover Scotland or Northern Ireland. But the trend makes for worrying reading.
The death rate stats
The ONS said: “For males in England, the age-standardised mortality rate was 40.5% lower in 2017 than it was in 1990. Between 1990 and 2011, there were 8.6 fewer deaths per 100,000 males for each rolling period; between 2011 and 2017 this had fallen to 1.3 fewer deaths per 100,000 males, a clear weakening of 85% in the rate of improvement.”
“For females in England, the rate was 30.5% lower in 2017 than it was in 1990. Between 1990 and 2011, the improvement rate was 4.3 fewer deaths per 100,000 females for each rolling period, whereas between 2011 and 2017, it was only 0.2 deaths per 100,000 females, a 95% weakening in the rate of improvement.”
As a result, the political debate has raged all summer – with some blaming austerity, others pollution, diet or even more virulent strains of flu.
Mortality rates good news for DB schemes
But it also appears to be having an impact on business. With its recent half year results, L&G said: “We continue to see evidence of higher than expected mortality. In 2017, our mortality analyses resulted in a pre-tax release of £332m of prudence within our reserves. At this stage in our review of the 2016 mortality tables, we anticipate a £300m to £400m release to be recognised in our 2018 full year results.”
Similarly, in March 2018, Aviva was able to release £290m from its reserves due to longevity assumption changes.
The change could also bring some respite for defined benefit schemes. Although the subject of considerable debate among DB consultancies and experts Raj Mody, global head of pensions with PwC, suggested that the slowing improvement in life expectancy could cut £310bn from the aggregate £530bn funding shortfall that currently exists for the UK’s DB schemes.
He suggested that if the latest life expectancy trends continued, schemes could then start to rework their assumptions about rapid long-term improvements.
Advisers rethink death rates
But should advisers, who don’t have actuarial calculations at their disposal, rework their assumptions too?
Kerry Nelson, managing director at Nexus IFA, says advisers should consider the ONS findings, albeit as one of many factors, particularly if it marks a significant change in direction.
Nelson said: “It is important to think about the impact of things like life expectancy in the way we advise clients. It affects the decisions people make and it certainly could affect the value of annuities. It could be a fundamental change. What if we have reached a peak?
“We have continued planning for a big rise in life expectancy and this has always meant encouraging people to save more and indeed to look at preserving assets when they have them. We are not going to turn our advice on its head, but at some stage you might need to factor this into your thinking on contributions, asset allocation, withdrawals and more.
“It could change the conversations we have with clients too. At the same time, you can’t say you know for definite and of course things could change again. The answer is as always to look at things very carefully on a client by client basis.”
Mixed messages for savers
Other advisers remain very wary and concerned it confuse their message about the need to save.
Cavendish Ware associate director Roy McLoughlin says: “I think we are in danger of getting ahead of ourselves. When I am chatting about auto-enrolment, one of the reasons young people give for staying enrolled, is that they say: “I am going to live too long”. For years before that, one of the main reasons people gave for not investing in a pension was: ‘Oh I am not going to live that long’. But people have started to believe that the demographics are against them. Let’s be really careful here before confusing that message.”
David Brooks, technical director with Broadstone, says some of the change could be down to methodology.
“That said, for many of our small schemes they’ll not have the depth of data to run their own analysis and so are in a quandary – to use the latest data or using perhaps more robust data that is older and indicating the higher improvement. This is a difficult position to be in and will result in many of them using the latest data but in the understanding this could be in part a statistical anomaly.”
However, Brooks said the slowdown in improvement does appear to happening.
“I would agree with the IFAs that we are dealing with, who say these are relatively minor corrections margins (a month or so here and there) and the trend is still for longer lives and so to dramatically revise the retirement expectations too much would seem unwise. What would be more useful is more detailed analysis around the life expectancies of different demographics and use those to better estimate someone’s longevity.”
Advisers may also want to note that while the ONS has warned about life expectancy, it issues a huge range of reports and in one of its most recent it warns that the UK will see an additional 8.6 million people aged 65 and over in 50 years’ time. Meanwhile, the 85-plus age group is expected to grow fastest. In 2016 there were 1.6 million aged 85 and above – 2% of the population – this should to double to 3.2 million by 2041 while by 2066, over-85s are likely to make up 7% of the population.
It is probably not quite time for advisers to drop the message about saving for retirement just yet.
