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Demography (concerning pension schemes)
Chairman: Ken Buffin US
Presenters: Richard Verrall UK
Stuart Leckie China
1st June 2006 14:15 – 15:45
Mortality Assumptions Used in the Calculation of Company Pension Liabilities in the EU
Prof Richard Verrall
Cass Business School
City University, London
Background• FRS17/IAS 19 has focused attention on the calculation of
companies’ pension liabilities and also highlighted their significance in the balance sheet
• Attention has been paid to key economic assumptions such as the discount rate and assumed inflation, both in terms of absolute level and consistency between countries
• The Mortality assumption, although material, has not been hitherto subject to the same level of scrutiny. In particular the extent to which the assumptions used are consistent between countries
• In many cases “Standard” tables have been used, which it was felt reflected very different approaches to both level of mortality and allowance for future trends
Objectives of the Study• Focus on assumptions used to measure liabilities for current
pensioners• Collect information on the mortality tables most commonly used
for valuing occupational pension liabilities• Compare the tables used both against population mortality in
each country and between countries• Identify the extent to which future improvements in mortality are
being considered/allowed for• Identify whether any conclusions could be drawn with a
particular focus on the issues raised for a multinational corporation with significant pension liabilities in the countries considered
• Focus on the EU countries, but also include US and Canada
age at death (in years)
mo
rta
lity
rate
50 60 70 80 90 100
0.0
0.1
0.2
0.3
UK: population and pensioners' probabilities of death
male populationfemale populationmale pensionersfemale pensioners
age at death (in years)
ratio
of
mo
rta
lity
rate
s
50 60 70 80 90 100
0.2
0.4
0.6
0.8
UK:pensioners' probability of death divided by population probability of death
male mortality ratiofemale mortality ratio
age (in years)
exp
ect
ed
fu
ture
life
time
(in
ye
ars
)
50 60 70 80 90 100
10
20
30
UK: population and pensioners' expected future lifetime
male populationfemale populationmale pensionersfemale pensioners
percentage percentagedifference difference
ex 16.13 20.96 4.83 30 19.08 23.79 4.7 24.6
ax : 3% 11.73 14.58 2.85 24.3 13.48 15.98 2.5 18.6
ax : 6% 9.19 10.98 1.79 19.4 10.3 11.73 1.43 13.9
ax + .6ax |y: 3% 14.55 17.07 2.52 17.4
age x = 65male female
population PMA92C10 difference population PFA92C10 difference
age at death (in years)
ratio
of
mo
rta
lity
rate
s
50 60 70 80 90 100
0.5
0.6
0.7
0.8
0.9
Belgium: pensioners' probability of death divided by population probability of death
male mortality ratiofemale mortality ratio
age at death (in years)
ratio
of
mo
rta
lity
rate
s
50 60 70 80 90 100
0.6
0.8
1.0
1.2
1.4
1.6
Denmark: pensioners' probability of death divided by population probability of death
male mortality ratiofemale mortality ratio
age at death (in years)
ratio
of
mo
rta
lity
rate
s
50 60 70 80 90 100
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Finland:pensioners' probability of death divided by population probability of death
male mortality ratiofemale mortality ratio
age at death (in years)
ratio
of m
orta
lity
rate
s
50 60 70 80 90 100
0.3
0.4
0.5
0.6
0.7
0.8
0.9
France: Various ratios of probability of death for males and females
TPRV93 divided by female populationfemale population divided by male populationTPRV93 divided by male population
age at death (in years)
ratio
of m
orta
lity
rate
s
50 60 70 80 90 100
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Germany: pensioners' probability of death divided by population probability of death
male mortality ratiofemale mortality ratio
Observed future life expectancy for a male aged 65 in the general population
17.2
16.8 16.816.6 16.5 16.5
16.1 16.1 16.015.9
15.6 15.6 15.5 15.515.4
15.1
14.0
14.5
15.0
15.5
16.0
16.5
17.0
17.5
Switzerland
France
Sweden
Spain
USA
Italy
UK
Germ
any
Canada
Norw
ay
Austria
Belgium
Netherlands
Finland
Ireland
Denm
ark
exp
ecte
d fu
ture
life
tim
e in
yea
rs
Typical assumed future life expectancy for a 65-year old male member of a company pension scheme
24.2
22.6
21.0 21.0
19.6
18.3 18.3 18.1 18.117.6 17.6 17.6 17.6
16.5 16.4
15.1
14.0
16.0
18.0
20.0
22.0
24.0
26.0
France
Spain
Ireland
UK
Italy
Austria
Finland
Belgium
Sweden
Norw
ay
Canada
USA
Switzerland
Germ
any
Netherlands
Denm
ark
expe
cted
fut
ure
lifet
ime
in y
ears
Difference between observed general population future life expectancy (Figure 1) and
typically assumed future life expectancy of company pension scheme members
(Figure 2) - male aged 65
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
France
Spain
Ireland
UK
Sweden
Italy
Finland
Belgium
Norw
ay
Canada
US
Netherlands
Germ
any
Switzerland
Denm
ark
diffe
renc
e (in
yea
rs)
The accounts of a multinational employer
• Must comply with international accounting standards
• Must be signed off by an auditor
• Accounts must present a true and fair view to investors and other stakeholders
Defined benefit pensions: a significant issue
• Many UK companies’ UK pension schemes are larger than companies themselves
• UBS study : Combined actuarial deficit in FTSE 100 companies’ pension schemes is over £40 billion
• Issue is not the size of this deficit (or surplus), but how it is measured
• Example : UK pension scheme, assets £800m, liabilities £1000m
Comparison of deficit in example pension scheme, using mortality assumptions typically
used in each country
263 260
220
200 200
174
151
122
97 94 94 9385
69
12
0
50
100
150
200
250
300
France
Spain
Sweden
Ireland
UK
Italy
Finland
Belgium
Switzerland
Canada
US
Norw
ay
Germ
any
Netherlands
Denm
ark
Def
icit
in £
mill
ions
The mortality assumption:The “last great uncertainty”
• Close scrutiny and disclosure of discount rates and other financial assumptions
• Discount rates measured to nearer 0.25% (or 0.1%)
• Change in mortality table potentially more significant than such a change in discount rate
Discount rate compared to 3% for the UK, equivalent to change in mortality table (male
age 65, includes reversionary widow's pension)
4.86
4.22 4.07 3.98 3.97 3.97 3.953.70
3.423.22
3.00 3.002.84
2.52 2.49
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
Denmark
Netherlands
Germ
any
Norway
US
Canada
Switzerland
Belgium
Finland
Italy
Ireland
UK Sweden
Spain
France
Dis
coun
t rat
e (%
)
What does this mean for multinational employers?
• Mortality does vary from country to country…– Underlying population mortality varies– Pension scheme members may be a
different subset of the population in different countries
• … but not as much as the assumptions would suggest– So are the figures really comparable?
What does this mean for multinational employers?
• Increased attention from auditors• Disclosure to investors and other
stakeholders• Notes to accounts
– Discount rate : single figure– Inflation : single figure– Return on assets : single figure– Mortality : …?
Conclusions
• Practice varies quite widely across the EU
• Different approaches taken to projection
• The effect on stated liabilities can be significant
Recommendations• The mortality assumptions be included in the
disclosure of pension expense in company accounts in as clear and informative a way as possible.
• Projected mortality tables allowing for future improvements of mortality rates be used in calculating pension liabilities for companies in all countries as far as possible
• Consideration should be given to the inclusion of a single figure to reflect the strength of the mortality assumptions used. We recommend that the disclosure be kept as simple as possible while remaining sufficiently informative for analysts and auditors to be able to have confidence in the results.
Cass Index of Mortality
UKAustria Belgium Denmark Finland France Germany Ireland Italy Netherlands Norway Spain Sweden Switzerland0.931 0.922 0.812 0.951 1.063 0.885 1.000 0.974 0.869 0.893 1.060 0.933 0.896
FranceAustria Belgium Denmark Finland Germany Ireland Italy Netherlands Norway Spain Sweden Switzerland UK0.876 0.867 0.764 0.895 0.832 0.940 0.916 0.818 0.840 0.997 0.877 0.843 0.940
GermanyAustria Belgium Denmark Finland France Ireland Italy Netherlands Norway Spain Sweden Switzerland UK1.053 1.042 0.918 1.075 1.202 1.130 1.101 0.983 1.009 1.198 1.054 1.013 1.130
Discount rate compared to 3% for the UK, equivalent to change in mortality table (male
age 65, includes reversionary widow's pension)
4.86
4.22 4.07 3.98 3.97 3.97 3.953.70
3.423.22
3.00 3.002.84
2.52 2.49
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
Denmark
Netherlands
Germ
any
Norway
US
Canada
Switzerland
Belgium
Finland
Italy
Ireland
UK Sweden
Spain
France
Dis
coun
t rat
e (%
)
Demography (concerning pension schemes)
“Longevity in Asia”
STUART H. LECKIE O.B.E., J.P., F.F.A., F.I.A., F.S.A.TEL: (852) 2147 9998FAX: (852) 2147 2822E-mail: [email protected]
1 June 2006
Overview• Map of Asia• Population and demographics• Overview – Asia pensions• Asia pension reform trends• Funding trends• Nature of benefits• Insurance industry• Conclusions
Map of Asia
Hong Hong Kong:7mnKong:7mn
Japan: Japan: 128mn128mn
Thailand: Thailand: 64mn64mn
Singapore: Singapore: 4mn4mn
India: India: 1,130mn1,130mn Philippines: Philippines:
83mn83mn
Indonesia: Indonesia: 223mn223mn
Korea: Korea: 48mn48mn
Malaysia: Malaysia: 25mn25mn
China: China: 1,300mn1,300mn
Taiwan: 23mnTaiwan: 23mn
Population & DemographicsJP KO CH T
WHK SG MY TH IN
SPH ID
Total Population (mn)
128 48 1,316
22 7 4 25 64 223 83 1,100
Pop. aged 15-59 (% total)
60 68 68 65 70 68 61 66 63 59 60
Pop. aged 60 and over (% total)
26 14 11 14 15 12 7 11 8 6 8
Dependency ratio (15-59/60+)
2.6 4.9 6.2 4.6 4.6 5.6 8.7 6.3 7.6 9.7 7.6
Fertility rate 1.3
1.2 1.7 1.6 0.9 1.3 2.9 1.9 2.4 3.2 3.1
Average life expectancy
82 77 72 77 82 79 73 70 67 70 63
Population & Demographics
Total Fertility Rate
- 1.0 2.0 3.0 4.0 5.0 6.0 7.0
World
Europe
Japan
Korea
China
Taiw an (est)
Hong Kong
Singapore
Malaysia
Thailand
Indonesia
Philippines
India
1970 2005 2040Source: UN Population Division
Life Expectancy
- 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0
World
Europe
Japan
Korea
China
Taiw an (est)
Hong Kong
Singapore
Malaysia
Thailand
Indonesia
Philippines
India
1970 2005 2040Source: UN Population Division
Population & DemographicsAsia and World: 60 & Over as % of Total Population
- 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0
World
Europe
Japan
Korea
China
Taiw an (est)
Hong Kong
Singapore
Malaysia
Thailand
Indonesia
Philippines
India
1970 2005 2040Source: UN Population Division
Elderly Dependency Ratio
- 2.0 4.0 6.0 8.0 10.0 12.0
World
Europe
Japan
Korea
China
Taiw an (est)
Hong Kong
Singapore
Malaysia
Thailand
Indonesia
Philippines
India
1970 2005 2040Source: UN Population Division
Overview – Asian Pensions
• Diversity of economies• Population size• Lump sum benefits• Unsophisticated• Termination of Employment
Indemnities• World Bank influence (5 pillar model)
Pension assets
JP KO TW CH HK SG MY TH INS PH ID
Public
(US$ bn)
670 130 21 50 0 73 65 12 1.5 4 0.5
Private
(US$ bn)
960 100 10 15 40 0 0 9 8 4 40
Asia Pension Reform TrendsConditions leading to reform
• Ageing demographics
• Rising burden on fiscal budget
• Limited existing social security coverage
Principles objectives of reform
• Extend coverage
• Increase retirement incomes while reducing reliance on government
• Shift pension responsibility to private sector
• Long term sustainability
Pension ReformsCountry Reforms
Japan First DC introduced in 2001 – ‘Japanese 401(k)’ New DB in 2002 to ensure portability and preservation
Korea Employee Retirement Benefit Security Act from 1 Dec 2005 to address failures of old system
China ‘Enterprise Annuity’ commencing in 3Q05 – Voluntary system but has full government support
Taiwan Mandatory DC from 1 July 2005
Hong Kong MPF introduced in 2000, first mandatory retirement system
Thailand Legislation for new mandatory system for private sector currently being debated in National Assembly
Indonesia Newly legislated National Social Security System includes mandatory DB & DC schemes for all formal and non-formal workers
India New Pension System, a DC scheme to replace traditional DB system since Jan 2004
Funding Trends• Move towards private sector• Must then be funded• Risks
– Biggest risk for pension plans is inflation– Liquidity is not an issue but volatility may be
• Trends– Invest in real assets – equities, property, REITS– International investments– Optimise long-term returns
• Needs– Annuity products to provide regular income
Nature of benefits• Private sector schemes generally pay
benefits as lump-sum or scheduled payments
• Lack of annuity products to provide regular income and longevity protection– Shortage of medium-long term bonds– Markets lack hedging instruments– Insurers unwilling to take longevity risk
• Civil servants usually have generous DB schemes
Life insurance industry(2004 estimates)
JP KO TW CH HK SG MY TH INS PH ID
Premium/GDP
(%)
8.6 6.8 8.3 2.3 6.4 6.1 3.3 2.3 0.7 0.9 2.3
Premium/capita
(US$)
3,100 873 1,050 25 1,483
1,300
140 52 6 9 13
Average real growth (% p.a.)
(1999 – 2004)
2 5 16 32 20 2 10 18 8 11 18