Development of the UK longevity market Rajeev Shah 9 December 2009

Agenda Background Economic issues Corporate issues Financial issues Longevity Market Focus of longevity research

Agenda Background Economic issues Corporate issues Financial issues Longevity Market Focus of longevity research

Background Improvements in longevity since 1855 Annual average rate of improvement in longevity Males aged 65 – 74 from

Background Changes in life expectancy at age 60

Agenda Background Economic issues Financial issues Corporate issues Longevity Market Focus of longevity research

Economic issues Overview Aging population Dependency ratio increasing –Increasing pensioner population relative to working population Health and old age care costs increasing –Healthy vs unhealthy life spans State pension costs increasing Increased burden on state / tax payer

Agenda Background Economic issues Corporate issues Financial issues Longevity Market Focus of longevity research

Corporate issues Aging workforce –NRAs increasing –Age discrimination legislation introduced Future pension provision more expensive Deficit on current final salary pension scheme Impact depends on size of scheme relative to size of Company –Pension matters affecting commercial issues

Agenda Background Economic issues Financial issues Corporate issues Longevity Market Focus of longevity research

Financial issues Overview Population living longer Increases the cost of: –Annuities purchased by individuals –Pension funds: DC – individual benefit decreases –Pension funds: DB – shortfall in funding arises –Insurance companies offering annuity benefits etc. –Benefits provided by certain charitable institutions Reduces the cost of: –Term / endowment assurance policies –Prepaid funeral plans

Financial Issues Changes in life expectancy at age 60

Financial Issues Impact on annuity rates of male aged 60 Life expectancy of male aged 60 in 2009 increased by 4 years from that expected in 1992 Assuming interest rate of 5% p.a. and 3% p.a. inflation, £100,000 at age 60 will give an annual income of: –£4,675 p.a. now, assuming life expectancy of 28.5 years –£5,215 p.a. should life expectancy be assumed to be 24.7 years (as projected in 1992) Increased life expectancy => decrease in annual income of approximately 12% Require an additional 1% p.a. investment return (from age 60) to achieve comparable income. Effect exaggerated, since interest rates fallen significantly since early 1990s => annuity costs increased significantly

Agenda Background Economic issues Corporate issues Financial issues Longevity Market Focus of longevity research

Longevity Market Drivers of longevity market Uncertainty about future longevity Significant financial implications if longevity is different to expected  desire to protect against changes  development of longevity market

Longevity Market Longevity Products Buyout and Bulk Buyout Longevity swaps Other more complex products developing: –Company taking over as sponsoring employer –Buyout, with investment strategy determined by client who retains investment risk –Limited term cashflow cover and Funding Level Protection Innovation and risk appetite helped by longevity research

Agenda Background Financial issues Economic issues Corporate issues Longevity Market Focus of longevity research

Focus of longevity research Drivers of Mortality Improvement  Law of diminishing returns at young ages  Changing lifestyle  Smoking  Obesity  Advances in medical technology  Heart disease  Cancers  Reversal of aging process

Focus of longevity research Mortality improvements for main causes of death Source: “Exploring the Critical Path”, Critical Illness Trends Research Group

Focus of longevity research Causes of death Source: ONS

Focus of longevity research Will mortality continue to improve? Professor Jay Olshanksy University of Illinois, Chicago Olshanksy argues that mortality will not continue to improve at its current rate. The main reasons he gives are obesity, the spread of disease and, most importantly, the existence of biomechanical limits on our lifespan. Professor Shripad Tuljapurkar Stanford University, California Study assumes that lifespans increase in line with current trends until 2010, but that anti- ageing technologies would then become available that would prolong life much further. These drugs and therapies would cause mortality to decline five times faster than historical rates between 2010 and 2030, before normal service was resumed.

Differences in mortality by socio-economic class Mortality varies by social-economic class Consider the following class definitions:

Life expectancy and social class Source: ONS

Life expectancy and social class Source: ONS

Longevity by social class Impact on costing Life expectancies of Male aged 65 (source ONS): - Class I (Professional)18.3 years -Class V (Unskilled manual)14.1 years Significant difference in cost of providing an annuity or a pension to the different classes Insurance companies and pension schemes use additional information to improve estimate of costs / pricing.

Longevity by social class Explanations for differences  Lifestyle  Smoking  Eating habits  Alcohol consumption  Wealth  Education  Access to medical services  Social networks  Nature of employment  Injury risks  Long-term health risks

Longevity by social class Proxy Factors for Socio-Economic Status  Indicators of socio-economic status could include: The individual’s occupation The industry in which the employer operates The individual’s salary The amount of benefit (but there are problems associated with using this) The individual's geographical location (postcode)

Regional Mortality Differences in the UK: Cold to Hot Data Source: ONS Key Population & Vital Statistics

SMRs in the UK: Cold to Hot Data Source: BW Model

SMRs in London: Cold to Hot Data Source: BW Model

SMRs in London: Cold to Hot Dagenham: e 65 = SMR: % Merton: e 65 = SMR: 77.09% Glasgow City: e 65 = SMR: % Data Source: BW Model but… Broomhill in Glasgow: e 65 = SMR: 84.62%

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Financial and Economic issues of increasing longevity Rajeev Shah 9 December 2009