Longevity undermines pension calculation accuracy

At the same time as Australia struggles with its superannuation policy settings, new research from State Street has confirmed longevity as a global challenge for pension funds.

A global survey of 400 pension professionals, commissioned by State Street, has revealed the degree to which longevity has clouded calculations, with one in 20 describing their confidence in the accuracy of their asset and liability valuations as less than 50 percent.

It said that only 21 percent had confidence levels in the 90 to 100 percent range with confidence dropping further in the Asia Pacific (APAC) region, with only 13 per cent having confidence levels in this range.

However the survey pointed to Australian superannuation executives being more confident than most, with Australian pension professionals averaging a rating of 79 percent, closely followed by Japan (74 percent). Respondents from Hong Kong and Singapore were the least confident (65 percent combined), with no respondents rating their confidence at 90-100 percent. The global average was 76 percent.

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The State Street analysis pointed to recently released WHO data showing life expectancy globally increased by five years between 2000 and 2015, the fastest increase since the 1960s. Japan, Singapore and Australia were among the top five countries where people lived the longest, with average life expectancies of 83.7, 83.1 and 82.8 respectively.

"Advances in medical science combined with changing lifestyles in the region are driving up life expectancy and making it more difficult for pension funds to assess the extent of their liabilities", Asia Pacific head of asset owner sector solutions at State Street, Beng-Eu Lim, said.

With this in mind, managing longevity risk is a priority in APAC developed markets where life expectancy is among the highest in the world: 29 percent of respondents across the region, and as much as 50 percent in Japan, said they gave the highest level of priority to managing longevity risk. This compared to just 26 percent globally.

"At the same time asset owners are adopting more sophisticated investment strategies, chasing yields in a low rate environment via more complex and illiquid alternative asset classes. This in turn is making it harder to assess their portfolio's true value," Lim said.