Expecting a long life? The latest proposal from the Pensions Minister may help you here. Steve Webb has announced that the Government is considering a proposal to provide pensioners, upon retirement, with an estimate of how long they might live. Morbid stuff, perhaps, but the thinking is that people tend to under-estimate how many years they might get before they shuffle off this mortal coil. This is particularly relevant for budgeting purposes: knowing that one might live for 25 years in retirement will of course lead to a materially different budget than if one can only expect ten years of life.
Webb’s proposal involves providing people with an average life expectancy, based on factors such as sex, socio-economic factors, where in the UK they live, and health factors such as weight and whether they smoke. These factors are seen to be ‘predictive’: that is, life expectancy would appear to depend materially on how people score on these measures. There is plenty of data out there—indeed, insurers use this to set annuity rates, which we previously considered in this space—and it is a relatively simple task to provide this information. But is it a good idea?
On balance, I would say yes. The Government is right to note that people’s estimates of future life expectancy tend to be low, as they are skewed by how long their parents and grandparents have lived. Life expectancy—from empirical data rather than opinion—has increased in the UK significantly in the post-War era. ONS figures show that a boy born in 1982 (no prizes for guessing why I have chosen this year) would live to age 71 on average, while the average life expectancy for a boy born in 2009 is 78: almost a ten per cent increase. It’s worth noting that these ‘from birth’ figures include the impact of infant mortality and death before retirement: if our boy born in 2009 gets to 65, rather than just having 13 years left, he actually has a future life expectancy of almost 18 years, taking him up to 83. How does this work? It’s to do with the fact that 78 is an average figure: there must be people who will live beyond that and people who don’t make it to 78. Averages are funny things: for example, I have an above-average number of legs. Some people have lost a leg; some people have lost both; the vast majority of us have two: therefore the average figure will be slightly below two. I have two, and am thus above average.
Thus, this ‘average life expectancy’ statistic can be misleading: it is not a promise of years in retirement, and we might expect as many people to overshoot as to undershoot it. A 65 year old man, about to retire on an annual pension of £50,000, in perfect health and looking forward to living out his days in the Home Counties could be run over by a bus the day after retirement, while a State pension-reliant, overweight 40-a-day man living in Glasgow who shares his birth year with the Home Counties fellow may well receive his telegram from the Queen (or King?). My comparison here is not intended to stereotype or cause offense to the people of that great city on the Clyde in which I spent my undergraduate years: I choose it solely to make the point that life expectancy statistics may well wind up being correct overall for the population in general, but they remain silent on the experience that an individual may enjoy.
Is this a role for the State? Well, as noted earlier, the cost to provide this is pretty minimal given that the ONS already hold most of the relevant data. And if you are contributing to a defined contribution pension, you will receive each year from your provider something called a Statutory Money Purchase Illustration, which sets out what you might get as a pension under different scenarios: this too is reliant on assumptions about future life expectancy (as well as economic factors) which are effectively the responsibility of the State. There is therefore a precedent in the State’s being involved in the provision of such information to individuals.
Further, the Osborne reforms to pensions in the 2014 Budget—also recently discussed in this space—increase the options available to those at retirement and allow people to decide for themselves how to spend their hard-earned life savings, rather than being at the mercy of the annuities market. It makes sense to ensure that people have all the information that they need to make the right decision at retirement, and the life expectancy statistics—imperfect as they will always be—go some way to help with this. Steve Webb’s suggestion is therefore worthy of some further consideration.
Jonathan Galbraith is a Fellow of the Institute and Faculty of Actuaries and a member of the Conservative Party. Born and educated in southern Scotland, he now lives in Warwickshire and works in the pensions industry. He writes in a personal capacity.
Nothing in this article constitutes investment advice and those coming up to retirement who require such advice should seek it from the proper channels.
Sources:
http://www.ons.gov.uk/ons/rel/lifetables/interim-life-tables/2008-2010/sum-ilt-2008-10.html
http://www.theguardian.com/money/2014/apr/17/steve-webb-death-date-estimate-pensioners
