Longevity risk is a major global issue that needs to be addressed as the repercussions are significant.
Longevity is the potential risk associated with the growing life expectancy of pensioners, meaning that people are not saving enough for retirement and outliving their assets. As a result, this leads to higher than expected pay-out-ratios for many pension funds and insurance companies.
Being highly aware of the issue and having worked in the actuarial space for over 16 years, I reached out to my strong network of industry leaders to get their stance on how longevity risk might be better mitigated.
And this is what they thought...
Europe has been highlighted as the region that is most at risk, primarily due to the freedoms that allow pensioners to use their retirement funds as the wish. Particularly in the UK with the benefits and government funding available, people are perhaps less inclined to consider longevity risks.
Why are individuals underestimating how long they will live?
Interestingly, the most prominent view from my network was that morality tables are no longer truly representative of today's society. People are now living longer, along with improvements in medical care and healthier lifestyle choices, statistics are outdated. Without the correct information it is unsurprising that so many people are ignore the risks of longevity.
So why are individuals unable to accumulate adequate savings?
Arguably not enough people are educated on how to efficiently save for retirement, the management of pension funds or longevity itself. Many people are unaware of the latest life expectancy trends, despite the available resources and statistics.
The majority of people also look at the life span of close family members for guidance but do not allow for generational changes and therefore misjudge how much they need to save for retirement.
On the other hand, there are individuals who are unable to accumulate adequate savings because they cannot afford to. As one actuary stated: "The people who need to save most don't have enough income to save. And if you do have a little money to save it's hard to get a decent return on your investments."
Without the additional funds to invest into a pension, along with the need to spend on immediate necessities, it can be difficult for individuals to accumulate adequate savings.
What are the long term implications of misjudged longevity to the individual?
Individuals are running out savings and rely on support from either the state or family.
Not enough people are educated on how to efficiently save for retirement, the management of pension funds, or longevity itself.
Poverty in retirement.
What are the long term implications of misjudged longevity to the economy?
Greater reliance on state benefits where these exists will exacerbate fiscal deficits. Ultimately, requiring either higher taxation, lower benefits or both.
Unbalanced populations - longer lives and reduced birth rates could create the 'perfect economic storm' of an increasing ratio of workers to defendants unless working patterns in later life change and individuals deeply held views of an ideal retirement age to develop.
There needs to be a key policy issue to ensure fairness between generations.
As a direct result of longevity risk many insurance companies have adopted a more risk adverse approach. In turn individuals need to be better educated on how to acquire the adequate savings to avoid longevity risks.
How do you think longevity risk should be better mitigated? Should society be better educated? Or is it down to the individual to independently acquire enough savings for a longer than anticipated retirement?
I would be keen to hear your thoughts, so please get in touch.