De-risking report 2025
With many pension schemes seeing improvements in their funding levels in recent years, trustees and sponsors are looking to reduce risks. In particular, as increased uncertainty around future mortality rates and longevity grows, 2025 presents an opportunity for pension schemes to lock in the attractive longevity pricing that is currently being seen in the market.
Whilst for many trustees and sponsors this may mean considering a full scheme buy-in, we are also seeing an increasing number keen to explore how they can manage longevity risk through longevity swaps.
As for 2023, 2024 has once again seen a busy longevity swap market, with four UK pension schemes completing longevity swaps covering £8 billion of liabilities. WTW acted as lead adviser on all these transactions.
It’s a common misconception that longevity swaps are only suitable for the largest of schemes with billions of liabilities to hedge, but this is far from our experience to date. There continues to be strong engagement from reinsurers for swaps of all sizes and as many trustees continue the “run-on or settle” debate, there is increasing interest from clients to take action to hedge unrewarded risks such as longevity. This year WTW has been lead adviser on two longevity swap deals of less than £500m of liabilities, one of which was the fifth in recent years to include non-pensioners. Despite their size, both “smaller” schemes benefited from competitive reinsurer selection processes and attractive pricing relative to the scheme’s reserves and are perfect examples that longevity swaps are also an option for smaller tranches of liabilities.
Longevity swap pricing is driven by the ultimate cost of the longevity reinsurance. Over recent years we have seen material reductions in the cost of longevity reinsurance, which has been primarily driven by:
From a pension scheme’s perspective, the important question is whether these trends are set to continue in 2025?
In relation to (1), with the market remaining hotly competitive, including potential new reinsurers entering the market, we can be confident of a buoyant market in 2025. Similarly in relation to (2), current projections are that risk-free yields are unlikely to materially decrease in the near term.
Therefore, the key determinant of the trend in longevity swap pricing in 2025 is likely to be in relation to (3) – views on future mortality. We spoke to our in-house mortality experts, Cobus Daneel and Stephen Caine, to get their views on the direction of travel for future longevity trends.
To predict longevity, actuaries have typically relied on recent historical trends to inform what is likely to happen in the near future. However, this ‘typical’ approach does not hold water in the wake of a mortality shock such as the COVID-19 pandemic. Most mortality forecasters initially adopted a ‘wait and see’ approach, but now, nearly five years after the first COVID wave struck the UK, can we once again rely on recent experience to inform the likely future path of mortality rates?
After the record lows in age-standardised mortality rates (the average mortality rate that would apply if the age distribution of the population remained constant over time) seen in 2019, average mortality rates in England and Wales were around 14% higher in 2020 due to the pandemic. Since 2020, there has been a slow reversion to the low 2019 levels with rates falling by about 6% in 2021, 3% in 2022 and another 1% in 2023. While at the time of writing this article, figures have not yet been confirmed, it is likely that we’ll see close to a further 4% reduction in mortality rates in 2024 – a figure that is slightly flattered by reforms to death registration time limits that were introduced on 9 September 2024.
The charts above illustrate the difficulty in interpreting the recent mortality experience. The charts show the age standardised mortality rates in England and Wales with two trend lines – Figure 1 with nil improvements and Figure 2 allowing for mortality rates to improve by 0.5% a year – overlayed on the same observed datapoints (with a +-3% corridor to allow for typical year-on-year volatility). While we’ve seen significant improvements in mortality rates since 2020, we are only now back to levels that we saw in 2019. As illustrated by Figure 1, some might argue that 2019 was just as much of an outlier as 2021 was and that we’ve not seen any real improvements in mortality for more than a decade. Others may argue that the short-term effects of the pandemic are yet to fully dissipate and that we’ll see a further reversion to the pre-COVID trend (see Figure 2). Recent experience does not give a clear steer either way, but we should also consider the wider context to inform our views.
Those who argue that we are unlikely to see material improvements in longevity in the short term often point to the challenges faced by the health and social care systems in the UK and how, despite major new National Health Service (NHS) funding commitments, this is unlikely to be resolved anytime soon (see Figure 3). They also point to the fact that deaths directly due to COVID are already at low levels and that even if these numbers would fall to zero it is unlikely to make much of a difference in overall mortality rates. In the face of a rising number of deaths linked to Alzheimer’s disease and dementia, as well as obesity, there is also a question about where future improvements will come from. The massive gains made recently in respect of circulatory and respiratory diseases are unlikely to be repeated and, in the case of circulatory disease, there are worrying signs at younger ages that there may be a reversal in trend.
However, we should not forget that mortality rates have been improving for a very long time and even where we’ve seen larger shocks, mortality rates have tended to quickly revert to their previous trend (see Figure 4). Sustained periods of increased mortality rates are also very rare, and even the slow improvements seen in the 2010s are unusual. At a time of rapid technological development, for example AI, why should we think that there isn’t a medical advancement round the corner that will significantly improve average mortality rates and population longevity again. Furthermore, since the shock in 2020, we’ve seen year-on-year improvements that average over 3% a year. This is all happening against a backdrop of increased NHS funding commitments and exciting medical developments such as for the treatment of Alzheimer’s and combating obesity.
The short answer is, nobody knows what is going to happen to future mortality rates and longevity. It is no surprise that the views within the actuarial community are currently polarised – with insurance and reinsurance actuaries’ best estimate views of life expectancies being higher than their pensions colleagues. The core CMI_2023 model fell somewhere between these views. The Continuous Mortality Investigation (CMI) Mortality Projections Committee are due to consult on a proposal for the CMI_2024 model in January. The Committee has suggested that some significant changes to the model may be introduced, including explicitly allowing for the COVID mortality shock rather than smoothing through it and also allowing for more flex in improvements between age groups to allow for the picture we’ve seen emerging at younger ages following the pandemic (mortality rates for the working age population are still well above the level we’ve seen prior to the pandemic). We don’t yet have an indication if these changes will result in an increase or decrease in projected life-expectancies compared to CMI_2023.
While there is still plenty of uncertainty, there are two things that we can say:
While projected life expectancies have reduced in recent years, the level of longevity risk associated with these projections have not. Moreover, the days of funding gains driven by decreasing projected life expectancies may now have come to an end.
This increased uncertainty in future mortality rates and longevity may mean that pension schemes are currently holding increased levels of longevity risk. We believe it is therefore important for pension schemes to consider their approach and develop a clear strategy for managing longevity risk – whether this is to self insure or hedge it through entering a bulk annuity or a longevity swap.
