A visit by two juvenile pensions advisers opens Candid‘s eyes to the alarming world of longevity risk among pensioners
They say when you get old, policemen and doctors start looking young, but they don’t warn you about pensions advisers. To me, pensions consultants should be dusty old men, peering through their pince-nez as they read the fine print of the latest HM Revenue and Customs legislation just for fun. At the very least, they should be serious boffin types, well into middle age, with salt and pepper hair, and a suit like your dad used to wear. But no, here I am in a trustee meeting, being advised by what appear to be a couple of schoolboys.
The first little chap, let’s call him Billy, has one of the worst cases of acne I have ever seen. The second, Jimmy, is trying to grow a sort of beard, but what is sprouting on his chin is golden and fluffy like a little yellow cotton wool ball. Inexplicably, both boys are wearing wedding rings. In this modern world, not only are children allowed to advise on pensions, they let them get married too. Suddenly I feel very old indeed.
Talking about death
Billy and Jimmy are here to talk about death. How jolly. You should know the pension trustees did not ask to talk about death. We didn’t say to our actuary: next time we meet, please can you drag in a couple of precocious teenagers to lecture us on longevity. No, this death business was all the actuary’s own idea. But still, we buck up and listen attentively.
The lads tell us all about the underlying distribution of death we can consider for our own scheme. How nice. Actually, I suppose it is good news that people are living much longer than previous estimates, but it has had a big impact on pension funding. Well, duh, I didn’t need a couple of kids to tell me that. However, what they have to say does start to get a bit more interesting with the next slide. Jimmy explains how longevity risk can be analysed further. There is systematic risk affecting large groups and there is the idiosyncratic risk of a small scheme. And guess what? To protect ourselves against these nasties, we can buy a new product: a longevity systemic risk swap. How exciting. If nothing else, a trustee meeting is a great way to improve your vocabulary.
I don’t get worried until Billy and Jimmy explain how this works. You have an assumption about when your pensioners die. You then buy this swap, which basically insures you against them dying any later. If they do die later, the provider has to pay their pension. If they die earlier, you have bought something you didn’t need. Is it me, or is this all just a bit sick? I know death has to be faced, and in the pension world it has to be sensibly planned for, but do we really want to be gambling money on when someone is going to die? How do the providers make their money, I wonder? The little boys tell me the providers do not take the risk themselves, but take out an insurance policy from a third party. My head is starting to hurt with the complexity of all this. So how does the insurance company make money? How does it ensure pensioners don’t live any longer than they are expected to? Could it be that they employ men in black suits to go out and frighten the ones with bad hearts? Should pensioners beyond their best-before date be afraid to go out at night? The insurance company knows where they live. We would supply their addresses because, apparently, where they live strongly affects the assumptions about their expected death date. Glaswegians, for example, are far less expensive to insure because their hearts are particularly bad, or something like that. Perhaps it’s all that haggis.
It keeps getting worse
If all this information was not worrying enough, it gets worse. Billy explains that if, later on, the pension trustees decide they no longer want a longevity risk swap, they can sell it on to someone else. They expect the market to trade these swaps just like any other investments. Well, call me oldfashioned, but this takes my breath away. They seriously want me to believe someone is going to buy, second-hand, something that is essentially a large bet on when a bunch of pensioners will pop their clogs? Plenty of people invested in sub-prime mortgages, didn’t they? But it doesn’t seem the most concrete investment. Why not invest your money in the lottery and be done with it?
Billy and Jimmy then tell us what sort of schemes these risk swaps are best suited for. They run through a list of criteria, none of which applies to our scheme. Phew. I don’t actually have to face gambling on our pensioners. Of course, the obvious question is: if longevity risk swaps are not really suited to schemes like ours, why has the scheme actuary just wasted an hour of my expected lifespan getting someone to tell us all about them. The equally obvious answer is: Billy and Jimmy may be fresh-faced, but I am sure they are big for their age when it comes to chargeable rates. I look at the rest of the trustees, expecting to see my own incredulity and annoyance mirrored in their faces. But they are all nodding enthusiastically. The chairman is even getting his pen out in a great-idea-where-do-I-sign way. If you are one of our pensioners, be afraid. Be very afraid.
Next time…Candid is miffed about admin.