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What new longevity measures mean for retirement advice

Lowe-Steve-700.jpgTraditional life expectancy figures are unhelpful for anyone trying to generate a sustainable retirement income

For the first time, the Office for National Statistics has released life expectancy figures that include two additional measures – median and modal ages at death – which raise some interesting points for advisers.

The variation between different types of life expectancy average revealed by the ONS is eye-catching – a range of more than six years for women and seven years for men.

Mean or “traditional” life expectancy is arguably the figure with the most influence on people’s perceptions because it is the one carried in media stories and most widely discussed. But while it has credence, it is also the most unhelpful measure for anyone trying to generate a sustainable income in retirement.

Why? First, the answer you get depends on what question you ask. Ask how long a group of people your age might live on average and the result will be far lower than asking at what age half will be alive and dead, and different again to the age at which you are most likely to die.

This is shown in the table below, which indicates a male at birth has a mean life expectancy of 79.2, which is more than three years lower than median (half die before, half after) life expectancy of 82.3, itself more than four years lower than the mode (most likely) age of death, which is 86.4 – a spread of 7.2 years.

For a female at birth, average life expectancy is 82.9 but half will live longer than 85.8 and the most likely age at death is 88.9 – a spread of six years.

Period Mean Median Mode
Male 2014 to 2016 79.2 82.3 86.4
Female 2014 to 2016 82.9 85.8 88.9
Source: Office for National Statistics

These are life expectancy from birth rather than at retirement age, which will add several years, and assumes no further improvements in mortality in the coming decades.

While facts in the newspapers may make it tempting for clients to target fixate, the reality is that life expectancy is transitory. A 65 year old man may be expected to live to 84 but those who make it will be expected to live to nearly 92.

The second reason is that the client sitting in front of you keen to discuss retirement strategies is very unlikely to be typical. They may well be wealthier and live in a more affluent area than average with more disposable income. They may be more likely to be professional level rather than manual workers. Marital status, family history and health will also have a big impact on that individual’s own life expectancy.

From 1 March, pension providers will have to display comparisons between the annuity rates they are offering and the highest income available in the market in an effort to encourage people to shop around.

While the motive is worthy, the flaw in the plan is that although the regulator’s own research found those with the most to gain were those who had missed out on enhanced annuities, the comparisons will not have to show if higher income is available based on an individual’s health or lifestyle.

That is because the FCA has allowed life and pensions companies to produce a comparison limited to the type of annuity they manufacture. This is wrong. Any comparison should take into consideration the customer’s personal details, so it should be customer centric and not business model centric.

Personalised underwriting was deemed too complex to enforce for the annuity comparisons, although most intermediaries already offer such services in a cost-effective manner that deliver the best client outcomes based on hundreds of different factors and complex research.

Technology should help us give averages the significance they do and do not deserve. It offers the opportunity to create a bespoke solution to the client you are advising, rather than a vague answer more suited to the hundreds you are not.

Stephen Lowe is group communications director at Just Group

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Life complicated enough for us the old generation today. It recently summoned up in a poster I saw in Dublin Airport.

    “Growing Old is mandatory
    Growing up is an option”.

    Since 1992 when started using Prestwood Financial planning software The question of life expectancy was an issue of great debate between myself and clients What is meaningful and realistic figure to place in the software.

    Even though I did have access to mortality rates I can distinctly remember asking Paul Ethridge way back in 1993 how he overcame the issue of mortality with clients. Paul stated that mortality figures are an indication of the average person longevity. Since you (Mr and Mrs Client) may not be “average” why not use an arbitrary figure of say 100 years of age.
    Worked every time

    It did with most clients and there is always the exception to the rule On each of her reviews she always raised the same issue and stated that based on the mortality of her family statistics she always insisted she would not see 80 and more likely not to survive past 75
    Next months she will be 89. Although she does complain about her minor ailments she still has razor sharp mind. At her review she will still question the use of age 100 in her plan.

    For the last 14 years I have changed tact some what and quoted the 17th-century proverb ” creaking gate hangs long on its hinges” The arbitrary figure age 100 remains in her plan.

    In 2018 I will be eligible for my state pension while I accept the reality of the first part of the statement quoted above The second part is some what of an issue to me and many of us in our sixties
    We are not giving up on life just yet.
    The perception I had of been reaching 65 some 40 years ago at age 25 some how remains a distant memory The slippers and pipe are not for me
    Therefore I think I will still use the arbitrary figure of 100 for cash flow planning and hope for the best
    I will leave the detailed analysis and statistical assumptions of my demise to the actuaries!!
    May I suggest as adviser you do the same and work on the premise Paul Ethridge gave me in 1993.

  2. W Sharpe called this the hardest, nastiest problem in finance. I am not sure we are able to manage this problem for most people other than through the pooling arrangements employed by DB pensions (occupational and state). Taking the wealthy out of the pool makes sense in a number of ways, they can afford the advice to shape drawdown to their cash flow model, they have the financial agility to start new ventures and with them out of the pool, there is a more equity for those still pooling mortality. Here’s a good article by Bart Huby of LCP which explores the same ground https://henrytapper.com/2017/12/01/bart-huby-of-lcps-helping-members-tackle-the-nastiest-hardest-problem-in-finance/. Good to see serious discussion of this really hard topic!

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