Don’t Get Too Excited over Lower Life Expectancies

Report says actuaries shouldn’t reverse mortality expectations despite recent data.

Life expectancy at birth has fallen for the second straight year, according to data from the National Center for Health Statistics (NCHS). And while it’s unlikely anyone would want to celebrate that, this can often be seen as a boon for pensions because it typically means reduced costs.

However, Segal Consulting says that life expectancy is still improving for those who have reached retirement age, and that pension plan actuaries should not reverse expectations for mortality improvement.

By law, funding for single-employer pension plans is based on mandated Society of Actuaries (SOA) tables and projection scales that are based on mortality data for private sector workers. While lower life expectancies typically mean lower costs for pension plans, Segal says it’s not so cut and dry, as there are many nuances to consider.

“For professionals who study population statistics, like actuaries and demographers, there are subtle but significant differences between life expectancy, longevity, life span, and mortality,” said Segal’s report.

Life expectancy is the result of a calculation that estimates the average number of years until death at a specific age, while longevity and life span are less specific terms that refer to an estimate of how long an individual might live. Meanwhile, the mortality rate is a ratio of the actual number of deaths to the size of the total population for a specific age or age group.

“Despite these differences,” said the report, “the media tends to use the terms interchangeably to refer to the estimated number of years until death.”  

However, between 2015 and 2016, death rates increased significantly for those under 45, while death rates decreased for those older than 65. Additionally, an analysis by the SOA confirmed that although the life expectancy for newborns decreased based on the NCHS study, the overall age-adjusted mortality rate in the US improved, albeit by less than 1%.

“The recent mortality rates observed for the retired population continue to support expected improvements in life expectancy for this group,” said the report. “Therefore, it is important for actuaries of multiemployer plans not to reverse their expectations for mortality improvement in response to the latest data.”

Segal also said while refinements may be necessary in the actuaries’ assumptions for pension plans, they should be based on longer-term trends.

“There has indeed been a trend of lower improvement over the last several years even at the older ages, but we should be cautious about setting long-term assumptions based on shorter-term trends—even when those trends last a decade,” said Segal. “It is too soon to tell whether longevity for the retired population will continue to improve at high rates.”

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