It's been an even more exciting week than usual for actuaries.
On Tuesday, the Wall Street Journal declared the actuarial profession to be the second best out of 200 career options.
On Wednesday, the International Monetary Fund (IMF) picked up the drum labelled longevity risk that actuaries are known to enjoy banging, and left the world's ears ringing. It issued a dire warning that life expectancy is being consistently underestimated by governments and their statistics agencies.
The IMF nicely summed up the consequences of quicker-than-expected-aging, in the words of Laura Kodres from their monetary and capital markets department. She said: "If you think about the global extent of longevity risk, it is really our own individual retirement finance problem multiplied a few billion times. This gets very large. "
'Very large' could mean tens of trillions of dollars on a global scale, according to the IMF. The UK could foot a £750 billion bill in today's money if it gets its life expectancy sums wrong, or close to 60% of GDP being added to the government's debt pile.
When actuaries visit company pension scheme trustees to warn them of their longevity risk, they present a worst-case scenario. This shows a pension fund drained dry by long-living members, and the fund then sucking the life out of its sponsor company to claw back a giant deficit.
It is this scenario that the UK's pension system is threatened with – having its tax income drained by ballooning retirement costs to the detriment of investment elsewhere, in schools or hospitals for instance.
Trustees at the pension funds of 12 FTSE 100 firms were able to complete longevity swaps by the end of 2011. These are designed to eliminate the risk of people living longer.
The UK government is unlikely to be able to solve things so easily – their longevity risk will stay with them.
Unlike pension fund trustees, who often stay in their voluntary roles for decades or more, today's Chancellor and Prime Minister might even have retired from the after-dinner speaking circuit by the time the country's longevity bill is due.
To be fair to George Osborne, plans to tie the state pension age to life expectancy leave the UK better placed than most Western European economies and Japan – who have faster aging populations and have implemented less pension reform.
The IMF suggests that financial companies and countries could innovate to chip away at the looming longevity risk. One suggestion is that people could insure their individual longevity risk.
What is certain is that the more people pay attention to actuaries and their technically-guised warnings, the better. Even those who aren't interested in the actuarial sciences will be interested in the abstract consequences of their risk graphs soon enough.
First published 18.04.2012
dbillingham@wilmington.co.uk
