As a nation, we stopped living longer in 2010. The upward trend in life expectancy ended and now a host of pension providers are reaping the benefits.

Insurance companies sell annuities, which are guaranteed incomes for life to people at retirement based on assumptions about longer lives. These companies have to hold cash in reserve to cover these guarantees. If someone dies before they are expected to, the companies gain.

Earlier this month, the Office for National Statistics said the UK had one of the largest slowdowns in life expectancy growth from the top economies in the world.

Two of the main reasons for the trend are a slowdown in improvements in fighting heart disease and rising deaths from dementia.

Tom Selby, senior analyst at AJ Bell, says ‘it is no exaggeration to say this [life expectancy slowdown] could yet prove to be the biggest public policy challenge of our generation’.

LOOKING AT THE CMI DATA

It could however be a positive driver for returns from the big insurers. Data from the Continuous Mortality Investigation (CMI) is used to provide mortality tables for actuaries advising UK life insurers and pension funds.

Insurance companies do not tend to adopt the latest CMI mortality tables as figures from the CMI may not be immediately relevant to their own annuity books.

Insurers’ 2017’s results were largely based on 2015’s CMI tables and saw significant mortality reserves released.

Standard Life Aberdeen (SLA) reported an additional £79m back in February after releasing mortality reserves. This is before the business went ‘capital light’ and sold its insurance businesses to Phoenix (PHNX).

In March, Aviva (AV.) released £290m of mortality reserves which helped bolster its dividend paying prowess.

Legal & General (LGEN) released £332m last year and is guiding to release a further £300m to £400m in longevity releases during 2018 due to changes in mortality rates.

Legal & General is now using CMI’s 2016 mortality tables for its current year analysis. Chief executive Nigel Wilson says ‘people are not living anywhere near as long as anyone thought they would’.

Jamie Clark, co-manager of macro funds at asset manager Liontrust (LION), says: ‘Legal & General’s capital release this year reflects a move to apply the Continuous Mortality Investigation’s 2015 findings. As longevity improvements decelerate, current reserves are deemed overly-cautious and excess capital can be released.’

DOES THIS TREND HAVE LEGS?

The fall in life expectancy may also affect company pension schemes as along with rising interest rates it should cut deficits in corporate schemes.

As annuities give savers a guaranteed income for life, they are based on the safest type of investment around, government bonds.

The Bank of England’s recent 25 basis point hike bringing interest rates to 0.75% is good news for corporate pension schemes as these funds tend to have large holdings of low risk government bonds.

At the start of the year, falling life expectancy and strong financial markets resulted in an average reduction on private sector pension scheme liabilities of 3%.

With smaller pension deficits, companies are in now a better position to pass on the schemes to insurance companies in the form of bulk annuities.

The big purchasers of bulk annuities have been Legal & General and Rothesay Life. However, with the amount of potential reserve releases on offer other firms such as Aviva and Phoenix have entered this potentially lucrative market.

The new changes to life expectancy may have an impact on the pricing of new annuity business. The products may become better value as insurers scale down their assumptions regarding how long their customers will live.

As an investor, Liontrust’s Clark says: ‘Simply put, reserve releases should increase earnings, help allay capital concerns and permit dividend growth.’ (DS)

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