The UK’s Continuous Mortality Investigation released the latest annual update to its CMI Mortality Projections Model, CMI_2025, on 10th March, showing cohort life expectancies at age 65 that are about eight weeks higher for males and about six weeks higher for females than in the previous version of the CMI model, CMI_2024.
This year’s update is expected to increase defined benefit (DB) pension scheme liabilities by 0.5% for schemes that adopt the model in place of last year’s.
The core change to this year’s model is that there is no core change. That happened last year, when the model underwent its most significant change for approximately a decade when it introduced an explicit mortality shock in 2020 (with a decreasing impact each year thereafter) in an attempt to better model the impact of the Covid-19 pandemic.
That this year’s calculations aren’t significantly different from last year’s doesn’t mean that the results are the same, of course, as the headline is that all-age mortality for both males and females has improved to an all-time low.
The results are of little surprise to actuaries.
“Unless there is an extraordinary event like Covid-19, we expect there to be improvements in mortality generally,” said Stephen Caine, Head of Mortality at WTW.
“The rate that global lifespan has increased by in the last two centuries has been consistent – around 2.5 years for every 10 years that passes. Better diets, better healthcare, new medical treatments all contribute to what is a longstanding trend and the last couple of years we have seen a continuation of that trend.”
DB schemes in the UK must undergo a triennial valuation, a process that assesses if the scheme has enough assets to meet its liabilities. Those set for their check-up this year likely used CMI_2022 in their last assessment, when all-age mortality was higher, so, while current insights show lower mortality than was predicted 15 years or so ago, with Brits expected to live a little longer (according to this updated model), the valuation class of 2026 face slightly higher liabilities.
“Life expectancy under the CMI_2025 model is still some way behind CMI model predictions made in the early 2010s before the slowdown in UK longevity improvements took hold,” said Caine.
“Still, updating mortality assumptions will typically bring about a small increase in liability values for schemes with an actuarial valuation this year compared with the CMI_2022 which is likely to have been used for the previous cycle of triennial valuations.”
A topic du jour in the UK’s DB pensions world currently revolves around whether or not to run-on their scheme to extract any surplus that they might have over and above their liabilities.
But while this new data implies extra cost, Alan Greenlees, Professional Trustee at ZEDRA, says that it is unlikely to sway many schemes away from any decisions they might already have made.
“For many schemes, the latest news will likely be a painful reminder that there are some risks against which they cannot hedge and such changes highlight the importance of run-on strategies having sufficient guardrails and contingencies in place,” he said.
“Run-on strategies that are well devised with clear frameworks are also likely to have unambiguous instructions on how, and when, surplus is to be recognised, so while movement in mortality assumptions may reduce or delay how surplus is distributed between sponsors and members, trustees and sponsors who have signed up to such run-on strategies will have been well briefed on the contingencies in place, the upside and downside risks and implications of not hitting funding level targets. I do not expect a change in mortality outlook alone to cause any advisors or sponsors to fundamentally change their endgame strategies.”
Those schemes that have already made the decision to purchase a bulk annuity buy-in or buy-out will have likely been told about the importance of getting their scheme data ready so that insurers can provide timely and accurate quotes for the premium. Schemes facing higher liabilities might be forgiven for using this latest news as added incentive to complete this task quicker, but that’s not necessarily the case.
“Schemes are aware of the importance of data preparation and crucially, the pricing impact that this can have if it is available. This is one of the core reasons why we see more schemes buy administration and data projects as priorities in their strategic plans. This is also one area of the pensions market which sees a lot of innovation, with AI and more sophisticated tracing methods yielding more promising results, so I expect there to be a muted impact of changing mortality on data preparation for a buy-out,” said Greenlees.
Some £500bn of liabilities has now been transacted in the UK’s PRT market. WTW expects £70bn worth of premium to be written this year between bulk purchase annuity transactions and longevity swaps.
That is a huge sum by any definition and provides fuel for those that say the capital markets need to become larger players in absorbing some of this risk. And the regulator in the UK is currently working on ways to create a more defined regime for capital markets participation in life insurance. In November last year, regulator the Prudential Regulation Authority, published DP2/25 – Alternative Life Capital: Supporting innovation in the life insurance sector, a consultation paper that set out the PRA’s thoughts.
At the time of publishing, the PRA has not provided an update (the consultation closed in early February). But regardless, Gemma Millington, Senior Pensions Risk Transfer Director at WTW, says that the market is working just fine the way it is.
“We don’t see the capital markets as a place to manage longevity risk,” she said.
“There is plenty of reinsurance capacity – around a dozen participants in the market for UK longevity risk are providing significant capacity. They all have a reason for taking it as a diversifier to other risks such as life insurance, and non-life risks. We’re seeing good pricing from the reinsurers thanks predominantly to higher gilt yields bringing down risk premia, as well as reinsurers generally becoming more adept at executing these deals which is bringing down costs.”
Lower pricing from reinsurers means better pricing for DB scheme sponsors – but lower mortality rates means higher pricing for DB sponsors. Which one wins? Is there going to be a discernible impact on activity in the UK’s PRT market as a consequence of continuing falls in mortality?
“We might expect a slight increase in pricing but not a step change. The main reasons driving annuitisation is the reality of many trustees’ seeing insurance as the best long-term home for pension scheme member benefits,” said Millington.
“Sponsors want to remove governance and liabilities, and the strong funding position of schemes generally means they can afford a de-risking solution. Insurers are often viewed as safer homes for these liabilities. I don’t think there’s going to be any material impact on the volume of business being transferred for these reasons.”
