Why does UUK continue to make false or misleading claims about life expectancy?
In his recent defence of UUK’s proposal to slash the value of future accrual for USS members by 21% on average (as confirmed by calculations of their own actuary), Alistair Jarvis leads off with a misleading reference to increases in life expectancy as an explanation of USS’s current predicament:
Jarvis’s opening lines are surprising for at least two reasons.
First, they will remind members of the following embarrassingly false red-highlighted claims that UUK made in 2014 regarding increases in life expectancy in retirement for USS members:
Click here for Jane Hutton’s blistering response to the red-highlighted claims, which prompted UUK to withdraw them. And click here and scroll down to their commentary on M17 for her and Saul Jacka’s further evisceration of UUK’s attempt to rationalise this claim.
Here’s the second reason why Jarvis’s opening lines are surprising: the updating of projections regarding the life expectancy of scheme members has actually decreased USS’s deficit in recent years.
UUK is right (see green-underlined claims above) that increases in projected longevity increased the deficit in 2011 and 2014. But, as I’ll show below, this was modest in comparison with other factors related to investment returns and other financial factors. Moreover, those increases in projected longevity have been more than cancelled out by decreases since 2014 in estimates of how long people will live.
For the 2011 valuation, increases in projected life expectancy increased the pensions liabilities and therefore the deficit by £0.6 bn, as compared with the surplus recorded by the 2008 valuation. By contrast, ‘lower than expected investment returns’ increased the liabilities by £2.9 bn and a decrease in the discount rate increased the liabilities by another £1.8 bn.
For the 2014 valuation, ‘Increase in long term life expectancy’ increased the liabilities by £0.5 bn. By contrast, ‘Reduction in gilt yields’, the 20 year planned ‘de-risking’ of the assets, and a reduction in the assumed inflation risk premium increased the liabilities by £7.6 bn, £3.1 bn, and £1.7 bn respectively.
For the 2017 valuation, a decrease in expected longevity decreased the liabilities by £2.8 bn — whereas ‘Change in underlying financial conditions’ increased the liabilities by an eye-popping £20 bn.
For the 2018 valuation, a further decrease in expected longevity decreased the liabilities by another £0.5 bn.
For the 2020 valuation, a yet further decrease in expected longevity decreased the liabilities by another £2.6 bn.
Bottom line: between 2008, which was the last time the scheme was reported to be in surplus, and 2020, where the scheme is now reported to be in £16.1 bn deficit according to the recent Rule 76 report, changes in mortality assumptions have actually led to a net reduction in the liabilities and the deficit by £4.8 bn.*
*Postscript 18 May: It has been drawn to my attention that it is misleading to sum up increases in £ bn of the liabilities in 2011 and 2014 and decreases in £ bn in 2017, 2018, and 2020, in a manner that gives equal weight to these increases and decreases. This is because a given £x bn change in the liabilities constituted a greater proportion of the liabilities in the earlier years than the later years, given growth in overall size of liabilities over time. That’s a fair point. But when we adjust for this by taking the extent in percentage terms to which the mortality adjustments increased or decreased the liabilities at the time, we will see that the decreases in recent years are still larger on balance than the increases in earlier years. The upward mortality adjustment in 2011 and 2014 increased the liabilities by 1.7% and 1.1% respectively. But the downward mortality adjustments in 2017, 2018, and 2020 decreased the liabilities by 4.0%, 0.7%, and 3.1% respectively. (Click here for spreadsheet spelling out calculations.)
It has also been drawn to my attention that if we simply compare the mortality assumptions for the 2011 valuation (the earliest available on the USS website) with those of the 2020 valuation, we’ll see that these assumptions were broadly unchanged between those two dates. In 2011, life expectancy for a 65 year old was assumed to be 23.7 for a man and 25.6 for a woman. The corresponding figures at the 2020 valuation are 23.8 and 25.3 respectively. Moreover, such lack of change is difficult to reconcile with my above claims that there has been a net decrease in the cost of USS DB pensions in recent years as the result of changes in mortality assumptions.
Here is my reply: Even if we assume that mortality has made no significant difference one way or the other to the cost of DB during the past decade, it remains the case that longevity has not been a driver of DB unaffordability in recent years. Rather, the problem has arisen from other factors, such as low interest rates combined with pressure from the regulator to set a discount rate that doesn’t deviate too much from gilt yields, and the related fact of more pessimistic assumptions regarding expected returns on investments. There is also the fact that USS has exercised poor judgment and made bad decisions in their attempt to navigate these challenges. See how poorly they have done in comparison with SAUL: