Why Australia’s official ‘life’ tables need updating

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The Actuaries Institute has called on the Government to have the official life expectancy tables, used by insurers and providers of pension products, updated. This followed a research note written by Jim Hennington, from the Institute’s retirement incomes working group.

In a statement published last week, the Institute said: “Crucial tables used in software to estimate retirees’ longevity and calculate how best to ensure their savings last, need a critical update.

The tables have a material impact on the way retirement income strategies and products are evaluated, and currently underestimate longevity.

“To have more than a coin-toss chance that a person’s retirement planning horizon is sufficient, you need to look at the timeframe that gives 80 per cent or more certainty of being sufficient.” While there is uncertainty around how long any one person will live, there are significant factors to take into account that result in big variations for groups, the research note says.

For instance, a couple of average health, aged 65 (male) and 62 (female), need a plan that lasts until he is 100 in order that they can be 80 per cent sure their financial plan meets their potential lifespan. That is 16 years longer than if the advisor used the simple “look-up” table for a 65-year-old male.

Nicolette Rubinsztein, Institute president, said the Government had made a strategic commitment to improve retirement income products, hoping to boost incomes for older Australians. But it was clear the tools financial planners use may not reflect best practice when it comes to Australia’s increasing life expectancy.

“Life expectancy calculations are often required in the superannuation and financial planning industries,” she said. “They have a material impact on the way retirement income strategies and products are evaluated.”

Over the past 50 years, Australians have seen a rapid and consistent increase in lifespans. In 1970, the average age of death for women in retirement was just over 80. In 2010 this had increased to age 87, which is what today’s basic lookup tables are using. But financial planners need to also consider how much this will increase between now and the time someone retiring today reaches their 80s or 90s.

“A healthy, well-educated female entering retirement today, who had an affluent career and enjoys a good quality of housing, is just as likely to live beyond age 100 as she is to die before age 80,” the report says.

Others have bought into the debate, too. David Orford, the founder and managing director of Optimum Pensions, who had previously founded the big superannuation systems company Financial Synergy, has been lobbying for a review of the tables for several years.

He said: “This [proposed]review of the longevity tables is a major initiative we identified and is the reason why the Orford Foundation has funded research with the Actuaries Institute. The consequences for people not saving enough before retirement over a longer period than expected are they have an increased chance of running out of money and being a financial drain on their children and/or taxpayers.

“We must have life expectancy tools that include all of the mortality improvements automatically built into them. This will give the super industry and retirees an accurate idea of how these improvement factors are going to impact the level of savings needed for a very long retirement. To do anything else would be misleading and it wouldn’t have super fund members interests at the core of what you are doing for them.”

Some advisors say that they already spread a client’s retirement benefit over a longer period than their life expectancy. However, doing this, using an account-based pension, correspondingly increases the amount left on their death and reduces their income and thus lifestyle up to that point.

Optimum Pensions has calculated there is somewhere around a three-year shortfall between the current Australian life tables for men and around two years for women. And that is a conservative estimate.

“The interesting point to make here is even when we look at either existing or improved life tables, these life expectancy statistics are averages which means that half the population is expected to exceed these averages,” Orford said.

“Secondly, these life tables do not take into account future assumed improvements in mortality. Given the trends in life expectancy, superannuation funds should be developing products and services with the knowledge that a large group of their members that will live well into their nineties and onwards to 100.

“In our opinion retirees need to be prepared for 35 years of retirement. In a post-retirement product offering scenario for super funds they need to be actively considering how to achieve this for a broad range of retirees also now needing to consider a low-yield economic environment.”

Sean McGing, the managing director of McGing Advisory & Actuarial, believes that the time for action on the tables is now. “This week’s research note on life expectancy in retirement by the Actuaries Institute is a stark reminder to fund trustees of the challenge in meeting retirees’ needs,” he said.

“Expected retirement income provision-time horizons need to be substantially increased.  The simple approach of using an individual’s Australian life tables’ life expectancy for planning is dangerous as it significantly underestimates what people need to plan for.

“In the real world, for a married male aged 65 for instance, income should be planned for 35 years, not 19.  I hope our industry recognises this up front and realises the scale of the change required in focus from accumulation to pension more generally, and that within pension trustees need to push ahead in developing pension solutions for members that are sustainable over these much longer periods.”

Grant Callaghan, the chief executive of Laneway Analytics, a data analytics vendor to super funds, said: “Based on my experience in data analysis for super funds, funds are not really asking members how prepared they are for retirement, let alone tackling the issue of improving longevity outcomes. The focus remains on accumulation – rather than the tricky issue of drawing down optimally.

“Within our own data analytics platform for super funds we are using the ASFA industry standard as just one benchmark to understand how individual member’s retirement savings are tracking. If we take this ASFA standard as a starting point, but we consider the fact that 73 per cent of retirees are expected to live past age 80 (Australian Life Tables 2015 – 2017), the longevity problem we see is that many Australians will outlive their retirement savings. So, we see two scenarios: the ASFA standard might not be relevant for some members, or this benchmark is actually too low, and many Australians won’t have enough savings for their whole life.

“Another way for funds to address this issue with data science is to personalise a post-retirement plan for members. Funds would need to undertake internal mortality investigations, which is completely achievable as this has been done before by defined benefit funds, and then further estimate mortality improvement factors for the future. Given that we have industry funds that can really drill down into these details and build a thorough profile, there are some great opportunities to really make a difference.”

He said the data science behind understanding a member’s possible retirement lifestyle and longevity outcome was at our fingertips. Australia should act on this from a member’s best interest perspective.

– G.B.

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