Moses, so we are told, was 120 years old when he died, and “biz hundert un tsvantsik” – [may you live] until 120 – is an old blessing. The joke it gave rise to is probably just as old: Harry is fed up with his noisy neighbour, so he confronts him: “May you live to 119!” he says to his neighbour. “May you live to 120!” he says to his neighbour’s wife. “Why the difference?” asks the neighbour. “After putting up with you, she deserves a year of peace and quiet.” is the reply.
Whilst pension scheme actuaries are not yet assuming that schemes will have 120 year olds, most scheme funding assumes that some pensioners will be receiving their pensions well into their 100s. This is the case even though the latest mortality tables show a slowdown in the rate of increase of longevity.
Longevity assumptions are by their nature volatile. And in a traditional final salary scheme, that volatility gets passed straight onto the employer’s balance sheet. Hence the interest in products such as longevity swaps, which help control that volatility. (And whilst on the subject, I should plug the fact that Mayer Brown recently acted for the National Grid’s pension scheme in a £2bn longevity swap with Zurich – details here.) Hence also the interest in scheme designs which help control that volatility, whilst providing better outcomes for members than pure defined contribution (DC).
Collective defined contribution (CDC) comes into this space – schemes which are money purchase, but which target a defined amount of pension, with provision to increase or reduce that amount depending on investment returns. There are many ways of structuring such schemes, and a government consultation on amending legislation to support them has recently closed. The Royal Mail is on record as looking at this as a way of removing volatility from its balance sheet whilst addressing the problem that DC transfers all of that volatility – and the risk of poor pension return – to members.
The risk to employers in CDC is that, back in the day, defined benefit pension schemes were effectively money purchase – in that, if they were wound up, members only received what the assets of the scheme would buy. Twenty-plus years of political pressure – including, famously, Allied Steel & Wire pensioners stripping to their underwear at the Labour party conference – has led to legislation which has turned these schemes into genuine liabilities of the employer, reflected on the employer’s balance sheet. Will politicians be able to withstand the pressure to do the same with CDC?
Back to living to 120. With age comes wisdom. Or perhaps not. The story is told of a father who sent his son out into the world with the words: “Remember, my child, ‘life is like a fountain’.” The son became a wealthy and learned man, whose opinions were sought by the great and the good from far and wide. Many years later, at his father’s deathbed, the son said to his father: “Father, when you sent me out into the world, you told me that ‘life is like a fountain’. I have puzzled over these words to this day, but I am none the wiser. Please, tell me, why is life like a fountain?” The old man raised his head, and looked deeply into his sons eyes. And with his last breath, he said: “Ok, ok. So life isn’t like a fountain.”