Commentary

 Comment

The grim worker

Michael Skapinker, Financial Times

Published 9:01 AM, 17 Jun 2008


Administrators of company pension funds worry about investment performance and intrusive regulators. But nothing bothers them as much as their members’ refusal to die.

The increase in human lifespan since the mid-19th century is startling. In 1840, Swedish women had the highest life expectancy of women anywhere, dying at an average age of 45. By 2000, Japanese women, now the world’s record survivors, were living until 85.

Only 35 per cent of those born in England and Wales in 1851 could expect to live until their mid-60s. Of those born in 1951, 80 per cent are expected to make it to 65.

In the UK, longevity is not only increasing; the increase is accelerating. Some experts predict that half of today’s 30-year-olds could live to be 100.

Could lifespans increase indefinitely? In their excellent report Apocalyptic Demography?, David Blake and John Pickles of London’s Cass Business School say that ageing is not a biological necessity. Mortality rates of sea anemones, for example, do not increase with age, which is probably why they do not have defined benefit pension schemes.

For companies that still have defined benefit pension plans, increased longevity adds hugely to future costs. The UK’s pensions regulator says each year that members live adds 3 per cent to a pension plan’s liabilities – and employers have no way of knowing how much longer members are going to live.

The Cass report says we can be 90 per cent confident that, by 2050, a 65-year-old English or Welsh male will live between 21 and 32 years longer – a huge and uncertain range.

This is why companies have closed so many defined benefit pensions to new and, in some cases, existing members. British employers began shutting defined benefit schemes after companies in the US, the other country where they were once prevalent. The schemes’ longer survival in the UK has made the country a pioneer in limiting longevity risk, according to John Fitzpatrick, an American partner at the UK-based Pension Corporation.

Pension Corporation is one of several companies offering to manage companies’ pension assets, liabilities and risks.

In February, Lucida, an insurance company, and JPMorgan launched a derivative contract to allow pension providers to hedge against an increase in lifespans greater than that predicted by a longevity index.

Last month, Pension Corporation announced that it would sell insurance to defined benefit pension plans worried that their members would live longer than expected. You usually buy insurance against events that may or may not happen: car accidents, theft, rain at Wimbledon. How does Pension Corporation plan to make money insuring companies against the certainty of increased longevity? Is that not like offering insurance against the sun setting?

Mr Fitzpatrick points out that not all lifespans are increasing at the same rate. Some people – smokers, drinkers, blue-collar workers – still die earlier than others. Pension Corporation will take a view on how long a scheme’s members and their dependants are likely to live and price the insurance accordingly.

Given that the insurance will continue until the last member’s dependant dies, this is quite an undertaking: it could be 60 years from now and there is no knowing what will happen to lifespans by then.

Although social class, employment and lifestyle greatly affect longevity, sex is a bigger determinant: a waitress in the UK is likely to outlive a male accountant. But there are signs that the longevity gap between men and women is starting to close.

Nor is there any certainty that lifespans will carry on increasing at these accelerated rates. There are some indications that US longevity increases are beginning to plateau, possibly because of obesity.

There are good reasons for providers of defined benefit schemes to buy themselves greater certainty (although it does not help the growing number of employees in defined contribution pensions).

But there is something too often left out of the discussion: our failure to adjust retirement ages to how long we are likely to live. Those who survive until 90 could spend a third of their lives in retirement. Not only is this difficult to fund; it is also a waste of willing workers.

While age discrimination is now illegal in the European Union, employers can still tell employees to go at 65. A challenge by a Spaniard forced into retirement failed last year in the European Court of Justice, which is expected to hear further challenges from British pensioners.

These applications have been opposed by employers. Given the uncertain cost of pension provision, and the certain fall in the number of young people entering the workforce, this opposition makes no sense.



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