Benefiting from the recent slowdown in mortality improvements

Trustees and sponsors of defined benefit (“DB”) schemes could be forgiven for assuming that the only way was up for life expectancies of their scheme members. For decades, mortality rates had been significantly improving. In the context of DB schemes, this generally resulted in more costly benefit provision for sponsoring employers. The Continuous Mortality Investigation (“CMI”) then introduced their 2016 mortality improvement tables which showed a slow down in mortality improvements and therefore a reduction in life expectancy in comparison to previous years. Was this a blip? The 2017 tables have shown the same slow down. Perhaps one of the biggest indicators that this is the ‘new norm’ is the PPF consulting to revise their s143/s179 guidance to reflect updated mortality assumptions. In relation to DB pension schemes, what might this affect?

1. If insurers adopt the most up to date assumptions for mortality, then the cost of insuring benefits is likely to reduce. It may be a good time for sponsoring employers to consider this option if they are already close to being able to secure benefits.
2. The size of cash equivalent transfer values will fall if calculations are updated to reflect new mortality assumptions. Anyone considering a transfer or within a guarantee period may want to consider this.
3. The size of the scheme’s technical provisions will likely fall if the trustees decide to adopt the most up to date mortality assumptions in the scheme’s triennial valuation.
4. Accounting deficits may reduce.

In terms of potential impact, the life expectancy of a 65 year old male based on the CMI 2014 improvement tables is around 22.9 years. Fast forward to the CMI 2017 model and the corresponding male life expectancy has fallen by 3.5% (with a similar reduction for females). The changes are even more pronounced when considering life expectancies for individuals not reaching 65 for 20 years which fall by around 5% - 6%. The impact on liabilities is a reduction of around 3% - 8%. Trustees should consider if triennial valuations should reflect the most up to date tables and therefore a reduction in life expectancy. This will reduce liabilities all other things being equal. Employers should consider the impact on insurer company pricing, accounting disclosures and transfer value exercises and should speak to an advisor to ensure optimum timing for any transactions or employer sponsored exercises.