The cost of living

By Tom McPhail | 06 Jun, 2008 

HSBC has announced that it is restructuring its Defined Benefits pension scheme, citing improving life expectancy as one of the key reasons for the change. According to HSBC, every extra year of life expectancy is adding around £340 million on to the scheme's liabilities. 

According to the Office for National Statistics, between 1981 and 2002 male life expectancy at age 65 increased by over three years. Just as worrying for pension schemes is that it is extremely difficult for them to predict what will happen next; the actuarial profession now recommends that pension schemes look at a range of probabilities, rather than one simple projection of future longevity improvements because they are so hard to predict. 

HSBC's answer is to still offer a final salary scheme, but with later retirement ages and with increased member contributions. Their employees are fortunate indeed to have an employer willing to continue to shoulder any final salary scheme risk, given the rising costs and future uncertainty. For the majority of private sector workers this option is no longer open, and defined contribution pensions are rapidly becoming the preferred solution for employers. 

The key message for individuals is that this longevity cost is real and it is relevant. One of the reasons that annuity rates have been steadily declining for the past twenty years (though not the only reason) is that the insurance companies know that they will have to pay retirement incomes for longer. The equation is inexorable; if the money is to be paid out for longer, then we all need to accept a lower income in retirement, or we need to save more of our pre-retirement income. How you choose to save for retirement is another issue, but the simple message is: spend less, save more.