Longevity risk, a ticking time-bomb for retirement

People underestimate how long they live.  Longevity risk - the risk of outliving one’s assets - is hence a global issue that needs to be addressed.  The repercussions are examined in detail in The Challenge of Longevity Risk: Making Retirement Income Last a Lifetime, a report jointly released today by the Institute and Faculty of Actuaries (IFoA) in the United Kingdom, the American Academy of Actuaries, and the Actuaries Institute Australia.

The report examines longevity risk under the retirement systems in the three countries.  Better systems are needed to educate both individuals and policymakers about dangers of running out of money in retirement and the choices people make in spending their retirement assets.  The shift away from Defined Benefit (DB) schemes to Defined Contribution (DC) schemes has switched the responsibility for managing longevity risk, alongside investment and inflation risk, onto the individual, however the impact of this switch has yet to be addressed by policy makers or properly understood by consumers.

The report identifies five challenges of managing longevity risk:

• Adequacy—Accumulating adequate savings over the course of one’s working life is crucial
• Information—People need information on saving and managing savings, not just at the point of retirement, but leading up to and beyond it
• Flexibility—It is critical that regulation is flexible to reflect individuals’ different retirement needs and their varying capacity to exercise choice
• Equity—As far as possible, governments and regulators should ensure that the retirement income system is fair and that the concept of “fairness” is understood
• Sustainability—Changes to a retirement income market should develop a long-term sustainable market.

Fiona Morrison, President of the IFoA comments,

“Research shows that individuals tend to underestimate how long they will live, which could cause both individual financial hardship and an increased burden on the benefit system.  Access to adequate financial advice will be vital for savers to understand all their options and the risks of the choices they make.

“It is important to encourage people to save and make choices at retirement that can lead to a sustainable income.  With the pensions freedoms that have come into effect in the UK recently, which allows pensioners to spend their retirement savings as they wish, the issue of longevity risk is a ticking time-bomb.“

Ken Hohman, International Secretary of the American Academy of Actuaries, comments,

“Longevity risk is not well understood by many people, and this lack of awareness can have significant implications for retirement income.  We hope to bring attention to longevity risk and ways to address it, and to examine public policy approaches to improve lifetime income options for a secure retirement. This is part of a broader focus in the American Academy of Actuaries’ ongoing initiative on aging.”

Estelle Pearson, President of the Actuaries Institute Australia, said,

"This international paper will help inform the debate now underway here and overseas about how to ensure retirement income systems remain fair and equitable now and into the future. The variety of suggestions reinforces the need for governments to outline a clear vision for their retirement income system including a set of agreed objectives to ensure that concessions and payments are well targeted to avoid the poverty trap for future retirees”

~ENDS~

Download a copy of the full report here: The Challenge of Longevity Risk: Making Retirement Income last a Lifetime

Editorial notes:

About the Institute and Faculty of Actuaries

1. The Institute and Faculty of Actuaries (IFoA) is a royal chartered, not-for-profit, professional body.
2. Research undertaken by the IFoA is not commercial.  As a learned society, research helps us to fulfil our royal charter requirements to further actuarial science and serve the public interest. 
3. Actuaries provide commercial, financial and prudential advice on the management of a business’s assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues.
4. Members of the IFoA have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyd’s.
5. Members are governed by the Institute and Faculty of Actuaries. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of actuaries in society.
6. The IFoA is available to provide independent expert comment to the media on a range of actuarial- related issues, including enterprise risk management, finance and investment, general insurance, health and care, life assurance, mortality, and pensions.

About the American Academy of Actuaries

The American Academy of Actuaries is an 18,500+ member professional association whose mission is to serve the public and the U.S. actuarial profession. The Academy assists public policymakers on all levels by providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice, and professionalism standards for actuaries in the United States.

About The Actuaries Institute Australia

As the sole professional body for Members in Australia and overseas, the Actuaries Institute Australia represents the interests of the profession to government, business and the community.   Actuaries assess risks through long-term analyses, modelling and scenario planning across a wide range of business problems. This unrivalled expertise enables the profession to comment on a range of business-related issues including enterprise risk management and prudential regulation, retirement income policy, finance and investment, general insurance, life insurance, health financing, and climate change.