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# Means to a trend

In the last couple of articles, I have looked at trends in male and female life expectancy over the last few decades and highlighted the implications of the significant increases we have seen.

I considered the impact these trends could have on the demand from clients for conventional annuities or flexible retirement income options such as drawdown.

Before considering other implications of life expectancy trends, however, and with particular relevance to the imminent introduction of statutory money-purchase illustrations for pension products, I would like to note two of the main ways in which mortality tables are presented.

The first and most commonly used method of presenting mortality statistics is to show the remaining life expectancy for a person of a particular age using averages for the whole country. Of course, this excludes the individual&#39s state of health. At this stage, can I remind readers that mortality tables are constructed on an historical basis and, therefore, show the remaining life expectancy for someone born many decades ago. They are not predictive and should not be interpreted as showing life expectancy in the future.

However, there is an often more useful method of presenting these statistics which financial advisers might well find very useful in many of their presentations and recommendations to clients. Colloquially speaking, these could be termed the “still alive” mortality tables.

These tables start by illustrating statistics for 100,000 people born in a given year. I will illustrate this point by using some simplified tables for males (below left).

A knowledge and understanding of the format of these tables should be valuable to an adviser. From the table illustrated, you should be able to deduce that – historically – for every 100,000 male births in a given year, 80,000 survived to age 60 and 50,000 survived to age 75.

These figures are important for retirement income planning for more reasons than simply general interest. They show us that, for every 80,000 males still alive at 60, 50,000 will still be alive at 75. Some reasonably simple arithmetic shows us that if we are talking to a 60-year-old male, we can assess his chances of surviving to 75 as being 50,000/80,000 = 62.5 per cent.

How relevant is this? Well, could I suggest this calculation is hugely relevant to retirement income option planning? Pension drawdown, for example, almost invariably offers much higher death benefits than conventional annuities but this particular enhancement matters only if the retiree dies during the period of deferment. Therefore, a quick look at the still alive mortality tables can help the adviser indicate to the 60-year-old male client that the chance of him dying before he becomes obliged (at least under current rules) to buy an annuity is almost 40 per cent, that is, the chance of him surviving – from the above calculation – deducted from 100 per cent.

Fine. But what about his wife? As you would expect, her chances of dying over the next 15 years are statistically lower than his.

By way of a quick and simplified comparison with the husband, her chances of survival from 60 to 75 would be around 80 per cent. This figure is particularly important, I would suggest, for retirement income planning recommendations. Among other issues, it can help to illustrate that the purchase of a surviving spouse&#39s pension from a retirement fund could prove to be valueless, especially if the spouse dies first.

To cut a very long story very short, all sorts of mathematical calculations can be derived from these still alive mortality tables, depending on the purpose of the exercise.

For example, the probability of 62.5 per cent for the 60-year-old male living to 75 could be used not only to illustrate his probability of death during that period (for annuity planning purposes, for example) but, alternatively, for long-term care planning illustrations to illustrate the significant probability that this chap will still be alive well into his 80s.

In short, the still alive tables are a goldmine of information for any advisers who spend even a short period of time understanding their format and the potential uses of the information contained therein.

However, I must reiterate a number of caveats. First, remember that mortality tables are historical, not predictive. Second, life expectancy has been consistently and significantly increasing over recent decades and is widely expected to continue this trend for the foreseeable future. Third, there are wide regional variations in life expectancy (see my last article).

Fourth, in relation to an important issue on which I would like to bring this article to a close, advisers and clients must understand the difference between mortality tables constructed on different bases for different reasons. As a prime example of this point, there is a major difference between mortality tables constructed from the whole population, those derived only from members of pension schemes and those relating only to buyers of purchased life annuities.

Put simply, mortality tables constructed from information relating to members of pension schemes invariably indicate a significantly higher life expectancy than those derived from the whole population. Why? It is suggested that members of pension schemes will generally enjoy higher levels of income than non-members and therefore – although this assumption cannot, of course, be applied to every individual in each group – can afford “the better things in life” including healthcare. They should therefore, it is suggested, live longer.

More obviously, life expectancy among buyers of purchased life annuities is considerably higher than the average for non-buyers, not because non-buyers necessarily less healthy lives but – as is well evidenced – because individuals who accept they have a below-average life expectancy would be foolish to invest in purchased life annuities.

In summary, alongside the warnings about using the correct mortality tables (all of which are freely and widely available online as well as from a number of insurance companies), advisers can significantly add value to the force of their recommendation by understanding and sometimes quoting extracts from mortality tables in relation to many areas of products and service.

In my next article, I will pick up on some of these points in starting a consideration of the ways in which advisers can most profitably deal with the imminent introduction of statutory money-purchase illustrations.

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