2006 PARIS
Demography (concerning pension schemes)
Chairman:
Ken Buffin
Presenters: Richard Verrall
Stuart Leckie
1st June 2006 14:15 – 15:45
US
UK
China
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
0.2
0.1
male population
female population
male pensioners
female pensioners
0.0
mortality rate
0.3
U K: population and pensioners' probabilities of death
50
60
70
80
age at death (in years)
90
100
0.4
0.6
male mortality ratio
female mortality ratio
0.2
ratio of mortality rates
0.8
UK:pensioners' probability of death div ided by
population probability of death
50
60
70
80
age at death (in years)
90
100
30
20
male population
female population
male pensioners
female pensioners
10
expected future lifetime (in years)
UK: population and pensioners' expected f uture lif etim e
50
60
70
age (in years)
80
90
100
age x = 65
male
ex
population PMA92C10
16.13
20.96
female
difference
4.83
percentage
difference
30
population PFA92C10
19.08
23.79
difference
4.7
percentage
difference
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
0.8
0.7
0.6
male mortality ratio
female mortality ratio
0.5
ratio of mortality rates
0.9
Belgium : pensioners' probability of death div ided by
population probability of death
50
60
70
80
age at death (in years)
90
100
1.6
D enmark: pensioners' probability of death div ided by
population probability of death
1.2
1.0
0.8
0.6
ratio of mortality rates
1.4
male mortality ratio
female mortality ratio
50
60
70
80
age at death (in years)
90
100
0.6
0.8
1.0
1.2
male mortality ratio
female mortality ratio
0.4
ratio of mortality rates
1.4
1.6
1.8
Finland:pensioners' probability of death div ided by
population probability of death
50
60
70
80
age at death (in years)
90
100
0.9
France: Various ratios of probability of death f or m ales and f em ales
0.7
0.6
0.5
0.4
0.3
ratio of mortality rates
0.8
TPRV93 divided by female population
female population divided by male population
TPRV93 divided by male population
50
60
70
80
age at death (in years)
90
100
0.8
0.7
0.5
0.6
male mortality ratio
female mortality ratio
0.4
ratio of mortality rates
0.9
1.0
Germ any : pensioners' probability of death div ided by
population probability of death
50
60
70
80
age at death (in years)
90
100
Observed future life expectancy for a male aged 65 in the general
population
17.5
17.2
expected future lifetime in years
17.0
16.8 16.8
16.6 16.5 16.5
16.5
16.1 16.1
16.0
16.0
15.9
15.6 15.6 15.5
15.5
15.5
15.4
15.1
15.0
14.5
14.0
Denmark
Ireland
Finland
Netherlands
Belgium
Austria
Norway
Canada
Germany
UK
Italy
USA
Spain
Sweden
France
Switzerland
Typical assumed future life expectancy for a 65-year old male member of a
company pension scheme
26.0
expected future lifetime in years
24.2
24.0
22.6
22.0
21.0 21.0
19.6
20.0
18.3 18.3 18.1 18.1
18.0
17.6 17.6 17.6 17.6
16.5 16.4
16.0
15.1
14.0
Denmark
Netherlands
Germany
Switzerland
USA
Canada
Norway
Sweden
Belgium
Finland
Austria
Italy
UK
Ireland
Spain
France
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
8.0
7.0
difference (in years)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Denmark
Switzerland
Germany
Netherlands
US
Canada
Norway
Belgium
Finland
Italy
Sweden
UK
Ireland
Spain
France
-1.0
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
300
263
260
250
220
Deficit in £millions
200
200
200
174
151
150
122
97
100
94
94
93
85
69
50
12
0
Denmark
Netherlands
Germany
Norway
US
Canada
Switzerland
Belgium
Finland
Italy
UK
Ireland
Sweden
Spain
France
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)
5.50
5.00
4.86
4.22
Discount rate (%)
4.50
4.00
4.07 3.98 3.97 3.97 3.95
3.70
3.42
3.50
3.22
3.00 3.00
3.00
2.84
2.52 2.49
2.50
2.00
1.50
1.00
0.50
France
Spain
Sweden
UK
Ireland
Italy
Finland
Belgium
Switzerland
Canada
US
Norway
Germany
Netherlands
Denmark
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
UK
Austria
0.931
Belgium
0.922
Denmark
0.812
Finland
0.951
France
1.063
Germany
0.885
Ireland
1.000
Italy
0.974
Netherlands
0.869
Norway
0.893
Spain
1.060
Sweden
0.933
Switzerland
0.896
France
Austria
0.876
Belgium
0.867
Denmark
0.764
Finland
0.895
Germany
0.832
Ireland
0.940
Italy
0.916
Netherlands
0.818
Norway
0.840
Spain
0.997
Sweden
0.877
Switzerland
0.843
UK
0.940
Germany
Austria
1.053
Belgium
1.042
Denmark
0.918
Finland
1.075
France
1.202
Ireland
1.130
Italy
1.101
Netherlands
0.983
Norway
1.009
Spain
1.198
Sweden
1.054
Switzerland
1.013
UK
1.130
Discount rate compared to 3% for the UK, equivalent to change in mortality table (male
age 65, includes reversionary widow's pension)
5.50
5.00
4.86
4.22
Discount rate (%)
4.50
4.00
4.07 3.98 3.97 3.97 3.95
3.70
3.42
3.50
3.22
3.00 3.00
3.00
2.84
2.52 2.49
2.50
2.00
1.50
1.00
0.50
France
Spain
Sweden
UK
Ireland
Italy
Finland
Belgium
Switzerland
Canada
US
Norway
Germany
Netherlands
Denmark
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 9998
FAX: (852) 2147 2822
E-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
Japan:
128mn
Korea:
48mn
China:
1,300mn
Taiwan: 23mn
Hong
Kong:7mn
India:
1,130mn
Thailand:
64mn
Malaysia:
25mn
Singapore:
4mn
Indonesia:
223mn
Philippines:
83mn
Population & Demographics
JP
Total
Population
(mn)
KO
CH
T
W
HK
SG
MY
TH
IN
S
PH
ID
128
48
1,31
6
22
7
4
25
64
223
83
1,10
0
Pop. aged 1559 (% 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
1.2
1.7
1.6
0.9
1.3
2.9
1.9
2.4
3.2
3.1
77
72
77
82
79
73
70
67
70
63
Fertility rate
1.3
Average life
expectancy
82
Population & Demographics
Life Expectancy
Total Fertility Rate
World
World
Europe
Europe
Japan
Japan
Korea
Korea
China
China
Taiw an (est)
Taiw an (est)
Hong Kong
Hong Kong
Singapore
Singapore
Malaysia
Malaysia
Thailand
Thailand
Indonesia
Indonesia
Philippines
Philippines
India
India
-
10.0
Source: UN Population Division
20.0
30.0
1970
40.0
50.0
2005
60.0
2040
70.0
80.0
90.0
100.0
-
1.0
Source: UN Population Division
2.0
1970
3.0
2005
4.0
5.0
2040
6.0
7.0
Population & Demographics
Asia and World: 60 & Over as % of Total Population
Elderly Dependency Ratio
World
World
Europe
Europe
Japan
Japan
Korea
Korea
China
China
Taiw an (est)
Taiw an (est)
Hong Kong
Hong Kong
Singapore
Singapore
Malaysia
Malaysia
Thailand
Thailand
Indonesia
Indonesia
Philippines
Philippines
India
India
-
5.0
Source: UN Population Division
10.0
15.0
1970
20.0
2005
25.0
30.0
2040
35.0
40.0
45.0
Source: UN Population Division
2.0
4.0
1970
6.0
2005
8.0
2040
10.0
12.0
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
670
(US$ bn)
130
21
50
0
73
65
12
1.5
4
0.5
Private
960
(US$ bn)
100
10
15
40
0
0
9
8
4
40
Asia Pension Reform Trends
Conditions 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 Reforms
Country
Reforms
Japan


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
First DC introduced in 2001 – ‘Japanese 401(k)’
New DB in 2002 to ensure portability and preservation
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)
Premium/GD
P
(%)
JP
KO
TW
CH
HK
SG
MY
TH
INS
PH
ID
8.6
6.8
8.3
2.3
6.4
6.1
3.3
2.3
0.7
0.9
2.3
Premium/capit
a
(US$)
3,100
873
1,050
25
1,48
3
1,30
0
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