Do you need Liability Reshaping?
We have provided actuarial advice to many employers in recent years on liability reshaping. This is often financially motivated because by swapping a high rate of guaranteed pension increases for a higher pension now cash flows are brought forward which are easier and cheaper to fund than distant cash flows. This can substantially reduce the cost of buying out pensions as employers reach the Pensions Endgame. These exercises tend to have a high take-up rate because pensioners in their 60s and 70s have a preference for a higher income now “while they can enjoy it.”
Outside of occupational schemes pensioners often opt for the DIY version – income drawdown and some individuals are motivated to transfer out of good occupational schemes for the extra flexibility of income drawdown afforded by personal pensions and SIPPs.
An interesting report just published by the Pensions Policy Insitute presents a scientific study entitled “Retirement income and assets: do pensioners have sufficient income to meet their needs in retirement?” that confirms our more empirical findings and identify a potential gap between the income needed and the actual pension income immediately after retirement followed by a period when an increasing element of disability results in a lower income requirement but also identifies for some pensioners and second peak in later life when the income need increases again as a result of disability and illness.
It is clear that occupational schemes do not have the flexibility that is really needed and therefore other sources of income are required (e.g. help from families and state support). However much of the work we have carried out for employers on re-shaping pensions away from providing expensive levels of guaranteed increases is a move in the right direction and the scientific study confirms the instinct of many pensioners to take more income now.
Spence & Partners is a leading provider of independent actuarial advice to employers on managing their liabilities including liability reshaping.
Please note that the author is a Governor of the Pensions Policy Institute and this post represents his own personal view and should not be taken as representing in any way the view of the Institute.
Posted in: Blog
Tags: Actuarial, Corporate, Liability Reshaping, Pensions, Pensions End Game
Comments
Great article; particularly “a potential gap between the income needed and the actual pension income immediately after retirement followed by a period when an increasing element of disability results in a lower income requirement but also identifies for some pensioners and second peak in later life when the income need increases again as a result of disability and illness.”
When I do seminars and ask members if they think they’ll live to 80, very few say they do. Many people are worried about long term care but most of them think that the £40-50kpa cost of fulll care should fall on others and don’t see why they should provide for themselves. People who claim to be risk averse show remarkable insouciance about their late old age. If annuities could be provided for just twenty years, I am sure many people would go for higher immediate income with nothing to come after (say) 80.
Bearing in mind the current threat to annuity levels from higher reserving costs, I am sure the insurers would jump at the opportunity to swap out long-tail longevity risk to indicidual pensioners.
Our children may not be quite so happy with such an unoly alliance!!