Tom Selby: Longevity’s implications for retirement investing

In the wake of former government health adviser Sir Michael Marmot’s surprise revelation of the recent flattening-out in longevity improvements, Tom Selby considers the implications for retirement investing

Retirement remains an unsolved puzzle for policymakers around the world. In the UK, for example, a system where most people annuitised has been unceremoniously ditched in favour of pension freedom and choice.

In Australia, by contrast, the government is moving in precisely the opposite direction, attempting to encourage the development of a guaranteed income market – ironically, partly because people are spending too little in retirement (a phenomenon known as ‘reckless conservatism’).

While there might be debate over the best way to build a decent retirement pot and withdraw it sustainably, there has been little disagreement over the likelihood future retirees would live longer than their predecessors. This trend, if it continues, clearly has implications for retirement income planning – namely that younger people will need to save more than their predecessors or simply retire later.

But is the prospect of endlessly increasing life expectancy coming to an abrupt halt? A study by former government health adviser Sir Michael Marmot suggests that, since 2010, life expectancy rises have shuddered to a near standstill.

According to Marmot, improvements in life expectancy at birth, which had previously been around a one-year increase every five years for women and every three and a half years for men, have slowed to a one-year increase every 10 years for women and every six years for men.

So why exactly is this happening? An excellent report by the Pensions and Lifetime Savings Association (PLSA) seeks to explain the recent flattening-off in life expectancy improvements identified by Marmot.

The first thing the PLSA report acknowledges is that it is impossible to point the finger of blame at any single factor. The health of human beings depends on various different things, including wealth, socioeconomic status, lifestyle choices and so on. However, the report points to an “increasing body of circumstantial evidence which it is difficult to ignore” suggesting government cuts might at least be partially to blame.

This includes a study by Nuffield Trust and the Health Foundation, which says austerity cuts in local authority budgets have led to “material spending reductions” on social, residential and home care between 2009/10 and 2012/13. This happened at the same time as an ageing population pushed up demands on these services.

The authors conclude: “It is highly likely that reduced spending on social care for older adults is having a negative effect on the health and wellbeing of users and carers, but poor linkage between health and social care data at a national level means that it is currently difficult to quantify the impact.”

The idea that austerity is causing life expectancy improvements to “grind to a halt” has, predictably, been seized on by a resurgent Labour Party.

A second possible factor is the rise in deaths linked to Alzheimer’s and dementia in recent years although, again, the evidence is not clear cut.

Patterns across society

It is also worth noting that shifts in life expectancy might not necessarily be linear across society. The PLSA report analyses longevity trends among defined benefit scheme members, grouping them into those who are ‘comfortable’, those who are ‘making do’ and those who are ‘hard pressed’.

It found that, while life expectancy has remained level at around 17 years for ‘hard pressed’ members and 18.7 years for those who are ‘making do’ since 2011, it has continued to increase for the ‘comfortable’ group, rising from 19.9 to 20.3 years.

But what about the longer term? We must not forget the recent reduction in longevity improvements – to be clear, we are as a society still on average living longer, just by a bit less – follows decades of rising life expectancy.

To offer some context, women’s average life expectancy at age 65 has risen 4.6 years from 18.9 in 1989 to 23.5 in 2014. At the same time, men’s life expectancy at age 65 has risen 5.8 years from 15.3 in 1989 to 21.2 in 2014. Furthermore, an independent report published by John Cridland suggests a baby girl born in 2017 can expect to live to be 94 years and a boy to be 91.

Clearly we do not know what the future holds. If science finds a cure for cancer, for example, average life expectancy could shift upwards dramatically.

Even without such developments, we should not lose sight of the fact that – based on current assumptions – there is a good chance someone retiring at 65 will need their pension pot to stretch out over 20 years or more.

This is the eventuality all advisers will be considering with clients. Average life expectancy might be useful in developing public policy, determining defined benefit funding requirements and setting annuity rates, but it is no more than a rough guide for individuals.

A healthy 65-year-old needs to understand there is a reasonable chance they will live to 90 years old and beyond – and plan their retirement income strategy accordingly.

Tom Selby is a senior analyst at AJ Bell