The cost of living longer

The Office of National Statistics has announced a sharp increase in life expectancy, which could put further pressures on annuity rates and company pension schemes.  So, even though more of the population is likely to live into their nineties, it could come at a price.

 Last month the ONS reported that in 2010 for the UK as a whole, death rates had fallen to their lowest ever levels.  UK mortality rates for men and women fell from 1,261 and 768 deaths per 100,000 people in 1980 to 655 and 467 in 2010. 

The ONS has put the improved mortality rate down to better medical treatment of illnesses and diseases, and reported that the biggest fall in recorded cause of death was from circulatory diseases.

Currently pension funds assume a 65 year old man will live to 88.  If life expectancy continues to increase at the current faster rate, then he would live to 91- three years longer than the current estimates.

Ross Matthews, the head of mortality research at actuarial firm Punter Southall said: “The 2011 figures suggest that previous financial predictions made by actuaries and pension firms may be wrong.  If mortality rates continue to improve at 4% a year then pension schemes' prudence might not look prudent enough.

"Based on these new projections, a 45 year old would live to 95 which is seven years longer. This equates to an increase of up to 15% on pension scheme liabilities, potentially driving deficits by up to 50%".

Last week, the UK’s Pension Protection Fund, which tracks retirement-plan finances, said that the total private-sector liability now stands at £969bn.  A 15% rise would add another £145bn to this bill.

UK companies have already been making hefty additional contributions to their pension funds to top up deficits.  These payments are currently running at about £28bn a year, according to the PPF.

Annuity rates are already at an all-time low. Twenty years ago a £100,000 pension fund would have bought a 65 year old man an income of more than £15,000 a year.  Today it secures less than £6,000.

Tom McPhail a pension expert at Hargreaves Lansdown said: “All the pressure on annuity rates is currently downwards, not just from continually improving life expectancy but also monetary policy, regulation and insurance company pricing patterns.  Investors can offset some of the impact of these factors by shopping around for the best possible deal, but at the moment it looks like the rates will continue to get worse before they get better.”



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