Thursday, October 22, 2015

Living Longer means problems for pension funds

It is reasonable to conclude that having a higher pension will for many increase their longevity

Mark Webster, Business Development at Equiniti Pension Solutions, admitted that this may be simply a reflection of the fact that wealthy people tend to live longer on average - and that wealthy people tend to have bigger pensions - so they are both a sign of wealth rather than being directly linked to one another.

Research, by pension scheme administrator Equiniti, looked at the details of 610,000 deceased pensioners, and discovered that someone with an annual pension of between £25,000 ($38,440 US dollars) and £30,000($46,128 US Dollars) was likely to live almost a year and a half longer than someone with a pension of between £10,000 ($15,600 US dollars)and £15,000 ($23,000 US dollars) a year.

It found that those who lived on:

  • £10,000 ($15,600 US dollars) to £15,000 ($23,000 US dollars) would live to an average age of 78.8 years,
  • £15,000(23, 000 US dollars)-£20,000 (30,752 US dollars) lived to 79.62,
  • £20,000 (30,752 US dollars) -£25,000 l($38,440 US dollars) lived to an average of 79.76,
  • £25,000 ($38,440 US dollars) to £30,000($46,128 US Dollars) lived to the age of 80.21.

The same effect sees people in wealthier areas living longer than those from less well-off areas. Good News, if you want to live longer, you need to have a higher pension and live in a nice area. Well living longer is the trend not only in Great Britain but Average life expectancy in the United States rose by almost eight years from 1978 to 2011, to 78.7 years, according to the Organization for Economic Cooperation and Development (OECD).

American men are living an average of two years longer than they were in 2000, and women are getting an additional 2.4 years, according to new mortality projections from the Society of Actuaries (SOA). The SOA is the official keeper of the mortality tables used to calculate the value of future pension obligations, and longer lives mean greater cost for plan sponsors.
This means there is a need for retirees to focus on longevity risk as they set goals for retirement saving and withdrawal rates. And, when considering the numbers, it's important to remember that the mortality data simply reflect averages; many of us — especially women — can expect to beat those numbers.

But the new projections also will have direct implications for defined-benefit pensions. 

Maintaining pension plans will become more expensive for plan sponsors, because the longer life spans will require them to increase projected future costs on their balance sheets. The value of payouts will rise anywhere from 4 percent to 8 percent, depending on the age of the retiree.

That, in turn, likely will accelerate a major trend among plan sponsors to adopt de-risking strategies. Sometimes, that simply means reducing equity exposure in plan portfolios. But it also can mean offering lump-sum buyouts

There is a need for retirees to focus on longevity risk as they set goals for retirement saving and withdrawal rates. And, when considering the numbers, it's important to remember that the mortality data simply reflect averages; many of us — especially women — can expect to beat those numbers

But the new projections also will have direct implications for defined-benefit pensions. Maintaining pension plans will become more expensive for plan sponsors, because the longer life spans will require them to increase projected future costs on their balance sheets. The value of payouts will rise anywhere from 4 percent to 8 percent, depending on the age of the annuitant.

That, in turn, likely will accelerate a major trend among plan sponsors to adopt de-risking strategies. Sometimes, that simply means reducing equity exposure in plan portfolios. But it also can mean offering lump-sum buyouts.

If you are offered a lump sum payment you should think very carefully about accepting it. You might want to wait for a better deal down the road. But there's a caveat: The value of future offers also will be affected by interest rates, which are at historic lows. Higher interest rates would be reflected in higher discount rates, which are used to calculate lump-sum values and lower payouts.

Deciding whether to accept a lump-sum offer is a highly personal decision. A key factor is how healthy you think you are in relation to the rest of the population. If you think you'll beat the averages, a lifetime of pension income will always beat the lump sum. The bigger picture of your retirement assets also matters; some people decide to take lump-sum deals when they have other guaranteed income streams, such as a spouse's pension or high Social Security benefits.

Others think they can do better by taking the lump sum and investing the proceeds. That is possible, but it needs to be weighed against the risks of withdrawing too much, market setbacks, or living far beyond the actuarial averages. However "doing better" on a risk-adjusted basis means you would have to consistently beat the rate used to calculate the lump sum by investing in nearly risk-free investments — certificates of deposit and Treasuries — since the pension income stream you would receive is guaranteed, with the exception of failed plans.

Although lump-sum buyouts are take-it-or-leave it deals, there could be additional buyout windows down the road in many cases, as sponsors work to reduce their pension obligation

So if you live longer do you want to take the chance and see if you can do better than well managed pension funds. It is safe to say that the dollar value of your pension, isn't going to be the biggest determinant of longevity. Given that your retirement income is only likely to have an impact on your health and wellbeing in the final third of your life - there is a good chance that your general wealth throughout your earlier life is likely to have a bigger impact on your overall health and longevity.

However, you have to ask yourself what you have to lose by saving more for retirement. While you may be hoping to boost your longevity, at the very least, saving more in your pension will mean that when it comes to retirement you'll be able to afford a better quality of life - even if the quantity falls short of your ambitions

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