The pensions crisis: new report challenges government life expectancy predictions  


LondonlovesBusiness published an analysis of UK pensions last month that forecasted doom. A new report suggests the warning was spot on, writes Charles Orton-Jones

When LondonlovesBusiness launched last month, I wrote an article on life expectancy. My “crackpot” notion was that life expectancy is increasing far faster than the Office of National Statistics is claiming.

The ONS models fail to recognise the improvements in medicine and other relevant technologies. They also – falsely – suppose that the rate of change is going to slow to a crawl. The result is projections that underestimate rising life expectancy.

In reality, there is a revolution in health care that is causing life expectancy to increase exponentially.

I had a tough job last month convincing anyone of my arguments but a recent report may make my life easier.

Mercer, a global consultancy firm with expertise in pensions, has announced that life expectancy assumptions by FTSE 100 firms increased by four months in 2010 and by about 2.5 years since 2005. (“FTSE 100 pension scheme longevity assumptions increase for fifth consecutive year”)

It is the fifth year in a row that FTSE firms have been forced to raise their life expectancy figures. The latest adjustment adds 1 per cent to the liabilities of pension funds.

This series of upward revisions is what I predicted would happen as the pensions industry copes with its flawed life expectancy forecasts. Their projections are wrong. Year after year the pensions industry increases its forecasts to cope with the problem.

Mercer says that its report “showed that FTSE 100 companies had increased their UK longevity assumptions by about three months for current pensioners and by about five months for future retirees compared to the previous report as at 31 December 2009. On average, male scheme members aged 65 are now expected to live until age 87.2, while those currently aged 45 who survive until age 65 are expected to live until age 89.2. This represents an increase of about two years in life expectancy from Mercer’s December 2006 report, highlighting that companies believe life expectancy has improved faster than previously expected, which has added to pension costs.”

In my article, I quoted the futurologist Ray Kurzweil who called pension industry projections and assumptions “completely absurd”. Another futurologist, Ian Pearson, agreed.

The Mercer report is yet more evidence that the futurologists are right and the pensions industry and ONS are wrong.

The long-term consequences of this error could well be ruinous for the pensions industry.

If you have a spare 10 minutes then please take another look at my article and tell me what you think: are pensions in serious trouble or not?