Jim Hennington has worked on the main theme of this blog most of his career. He has helped make it possible Australians to convert Super pots into lifetime pensions.
This is a post that Jim is pointing at people who know enough about pensions to understand what “stress-testing” of a pension model means. It means for Jim that the solution can withstand assaults of high inflation , market downturns and what is rarely considered, the impact of the length of retirement extending because we live longer.
I argue that the risk of improving longevity is a stress that can be managed by CDC but less easily by DB pensions and annuities
I will not publish the erudite work of actuaries as dear to us as Stuart McDonald, but I urge you to read Guy Coughlans and Richard Faragher’s study from this link.
This is Guy’s summary of his paper
What if the life expectancy of 65-year-olds increased by 10 years within a decade, not gradually and predictably but suddenly, driven by a medical breakthrough that financial markets recognise long before it is fully realised?
This paper argues that such an extreme longevity scenario, a high-impact/low-probability event involving a rapid and substan5al increase in lifespan and health span, has become a credible and underappreciated systemic risk for pension plans, insurers, reinsurers, governments and the wider financial
system.Advances in the biology of ageing have fundamentally changed the outlook. Ageing is no longer viewed as an immutable process, but as one driven by identifiable and modifiable biological mechanisms, called the “hallmarks of ageing”.
Interventions targeting these mechanisms have already been shown to extend lifespan and healthspan in multiple species and improve metrics reflecting biological ageing in humans.
Emerging evidence suggests that combining such interventions may produce additive and synergistic effects, raising the possibility of a step-change improvement in lifespan. This is not simply about curing individual age-related diseases, but about targeting the underlying processes that drive them all.
I will add to this the thought that might be going through your head. Could pensions withstand the impact of a 10 year life expectancy? A DB scheme and Annuity that have promised a lifetime pension would need to turn to sponsoring employer or the insurance company insuring the annuity. This could lead to awkward consequences.
Although it would not be pleasant to break the news that pensions were falling, a CDC plan would comfort its members that they would on average be pensioners for 10 years. There would be no recourse to employer or insurer not threat of a haircut from the PPF or FSCS if employer or insurer went bust as a result of the bill presented by the actuary.
Guarantees are difficult things and I would put a good word in for CDC plans as flexible enough to withstands the bizarre but very real risk of people living a lot longer!