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Monday, May 30, 2016

Pensions - “The debts of the father are to be laid upon the children.”

Today's FT has an article about the impact of increasing longevity on pensions. Sorry, no link, it is behind a paywall.

This is a very topical subject in the UK as two large companies that have recently gone into receivership have massive unfunded pensions obligations. Of course the sums involved are nothing compared with that of the UK Government itself. An amazing £1.3 Trillion appears in the UK accounts as being unfunded pensions for those that work for the state.

The basic premise is that longevity rates are rising faster than predicted. Link this to the falling rates in returns from investments and you have a BIG problem for pension trustees, insurance companies with annuity arms, shareholders of companies with legacy final-salary pension schemes and municipal and finance ministry officials worldwide. Yes America we mean you and the unfunded pensions that are crippling so many of your cities

Let's put aside the blue sky thinking of people like Aubrey de Grey and all the stuff about reversing the process of telomeres that shorten with every cell division finally causing cells to stop dividing or die. Maybe this will happen, maybe not, but certainly not in the next 5-10 years and most definitely not at a level where it will have a significant impact on mass longevity.

No, we are talking about very small increases in longevity that mount up, year by year. BofA believes that in North America, a one-year increase in longevity “could more than double the amount of aggregate pension underfunding” and that worldwide, annuity and pension-related longevity risk exposure is already a “worrying” $15tn-$25tn, about three months’ worth of global gross domestic product. The numbers are so big it is impossible to get your head around them. A bit like the sub-prime housing investments just before the Wall Street crash.

In case you are only a tad concerned by these numbers, let me add another thought. What is not increasing at anything like the same rate as life expectancy is healthy life expectancy. This means that we will see longer periods when people require high cost medical and care interventions.

This is all too worrying. Let's move onto something less concerning. Why should you be any different to the politicians and policy makers. Dick Stroud

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