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Special Report

Impact investing


Longevity: Living longer, costing more

In 1985, for every person turning 65, there were 10 new people of working age. According to estimates from the UN, by 2040, for every person turning 65, there will be less than one additional person in the 20-64 years age groupage  

The working-age population of the world is still growing, but the pace of that growth is slowing everywhere – even in places one might not expect, like Africa. The growth rate will turn negative in Europe over the next couple of years and by 2050 it is projected to be negative in Asia and Latin America, too.

We hardly need to tell a pensions-industry readership about these trends. But it does help to begin to delineate the nature of the costs they imply. Those costs come in at least two or three different forms: direct costs to pension funds, in the form of increasing liabilities, and implementing strategies to manage longevity-related risks; and indirect costs related to the fiscal drag that ageing will exert on economies, and its effect on investment portfolios via the impact on financial markets.

We tackle the most practical aspects in the second half of our report. The first step to managing pension fund longevity risk is quantifying it as accurately as possible. David Blake and Andrew Hunt of the UK’s Pensions Institute offer their new ‘general procedure’, which aims to improve mortality modeling by unbundling age, period and cohort dimensions in the population-sample data. A better mortality forecast should mean better, and possibly cheaper, hedges. Debbie Harrison, also of the Pensions Institute, points to the potential savings that can be made with medically-underwritten ‘enhanced’ bulk annuity purchases, for example. In our final article, we consider the current pricing of ‘DIY’ buyouts (in which a fund enters into a longevity swap while purchasing a bulk annuity) against full buyouts, and ask whether the improving cost of full buyout is behind the recent decrease in DIY volumes.

 In the first half of our report we look at the bigger economic picture. Douglas Renwick and Eugene Chiam of Fitch Ratings outline the potential fiscal costs of demographic projections and the urgent need for reforms to meet the challenge, and we open with an analysis of the ‘asset meltdown’ hypothesis – the idea that a wave of retiring baby boomers will ravage financial asset portfolios as they try to sell huge volumes of equities and bonds to an ever-shrinking cohort of savers.

We hope that, taken together, our report raises awareness of both the potential for ageing to affect pension schemes broadly – as investors, as agents within economies, across assets as well as liabilities - and of some solutions to the problems.


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