Wednesday, 14 July 2010

Longevity in strategic planning

Longevity has been in the news again this week - in contradictory stories.

The BBC reports that the European Commission has warned EU member states to overhaul their pensions systems to adjust for low birth rates and ageing populations as life expectancy increases. They note that there are currently four working people for each person over 65, but warn that this will increase to only two working people for each person over 65 by 2060. The also note that less than 50% of adult Europeans are still in employment by the age of 60%. (They also highlight discriminatory and tax rules and barriers to cross-border activity relating to pensions, but that is another topic altogether.)

On the same day, the FT reported that RMS, a leading risk modeller for the insurance industry, has predicted that the recent rate of increase in life expectancy will not be sustained. As a result of this, they argue that insurers and pension funds may already be overstating the risk of longevity increases on liabilities. RMS base their assertion on the extent to which known causes of death, such as heart disease, have already been controlled (resulting in diminishing marginal returns from further work in those areas) combined with a review of thousands of medical trends and drug trials suggesting what new areas of improvements might or might not be opened up.

It's is the job of actuaries to balance these seemingly contradictory views in assessing future insurance and pension liabilities.

In strategic planning, however, we are able to consider both by constructing different scenarios for different potential outcomes, and then testing strategies against all scenarios. In this way, strategists can conduct rational analyse to formulate strategies which are robust regardless of whether its the European Commission or RMS who turn out to be right.