EUROPE - Policymakers can help DC scheme members by providing better data on longevity to ensure fair annuity pricing, says a report by the DC working group of the Groupe Consultatif, the European umbrella organisation of national actuarial associations.
"If there are countries where there is a lack of such data on annuitant mortality, product prices may be higher than they might otherwise be and consequently members' benefits may be lower," the report entitled "Avoiding Pitfalls In Retirement: A Report on Defined Contribution Pensions!" pointed out.
The working group, consisting of actuarial experts from Lithuania, the UK, Denmark, Hungary, Poland and Austria, called for a study into the effect of a lack of sufficient data on annuity pricing in various countries.
Calculations by the working group on the length of the decumulation phase in the UK show just how much longevity risk has increased.
In 1985 a 25-year-old could expect to need pension pay-outs for 13.2 years on average if male and 21.4 years if female. Using the latest tables, these figures have increased to 16.9 years and 24.2 years respectively, lowering the ratio between accumulation and decumulation periods from 0.33 to 0.42 (male) and 0.61 to 0.69 (female).
"On present trends, the retirement age would have to rise by approximately one year every 10 years for males and slightly more slowly for females in order to retain equivalence," the report noted.
With longer pension pay-out phases, the risk of inflation consuming the purchasing power of pensions is also increasing, the working group added. Therefore, inflation-linked bonds should be more widely available.
"Alternatively, consideration could be given to EU-wide inflation risk transfer arrangements," the report also said.
Other measures to mitigate risks in DC schemes including product innovation ideas for annuities were presented by Ken Forman, member of the DC working group at a conference in Vienna. (see earlier IPE-story: DC plans need better design - actuaries)