2006 PARIS

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: stuart.leckie@stirlingfinance.com

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

Conclusions

• Need to develop bond markets

• Insurers must take on mortality

risk

• Rationalise tax rules

• Education and communication