Newspaper article The Evening Standard (London, England)

Tackling Pension Problem Is a Matter of Guesswork; CITY COMMENT

Newspaper article The Evening Standard (London, England)

Tackling Pension Problem Is a Matter of Guesswork; CITY COMMENT

Article excerpt


AEROSPACE and defence contractor BAE Systems struck an innovative deal with its workforce this week, under which employees and company jointly share the risk of people living so long that the pension fund will run out of cash.

They have charts that predict how long people will live. If it happens in the years to come that people are living longer than predicted by these charts, members of the scheme will agree to retire a bit later or accumulate their pension entitlement at a slower rate. The company, for its part, will keep paying in, with the result that in effect 40% of the extra cost will fall on the employee and 60% on the company.

It is a great solution provided the predictions are right - but there is no guarantee at all that they will be. Actuaries have taken a lot of stick in recent times for apparently failing to notice that people are living longer, but a lot of the flak has been misdirected because there is a wealth of conflicting evidence behind the apparent fiasco.

Starting with the simple stuff, actuaries say that between 1920 and 1970, there was very little change in how long someone of the age of 65 might expect to live.

What changed materially in that time, however, was their chances of getting to 65 in the first place, because it was from the 1920s onwards that the big breakthroughs were made in wiping out the infectious diseases that had hitherto killed so many children.

Average life expectancy rose in the period because there were not the large number of childhood deaths dragging down that figure. However, when you got to 65 - if you did get there - then you were not going to live much longer than your parents did.

In the period from 1970 to 2000, this changed dramatically. Life expectancy for our 65-year-olds went up by about four years over those two decades, and the evidence suggests that it is continuingto go up at about that rate.

This means that every five to six years, the nation's pension funds will have to budget to pay all their members for an additional year. …

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