Edition: November 2018/January 2019
The impact of longer and healthier lives
Retirement planning must provide for increased longevity, urges Liberty Corporate head of investments and annuity products Louis Theron.
Living a healthy life is a priority for most people. Hence the rise in the number of fitness initiatives, increased gym memberships, wellness clinics, and the plethora of vitamins and supplements on offer.
Healthier lifestyles are facilitated by the diversity and variety of healthy food products, including organic fruit and vegetables sold by both chain and specialist stores. The demand for healthcare comes from the desire of consumers to gain and retain as good a state of health as they can. Those with the means also choose to have medical aid and/or insurance to mitigate the risk of ill health or disease.
Already in the Western world, people are living longer than their grandparents. This is due to everyday lifestyle circumstances such as housing conditions, diets, exercise, job and stress management, as well as medical care. In the future, medical, food and lifestyle advances will enable individuals will live even longer. This increase in average life expectancy and health quality saw the World Health Organisation reclassify "middle-aged" in 2016 to be between the ages of 66 and 79. Previously it was between the ages of 40 to 60.
Danish research shows that, by 2045, the number of people aged 60 or older will be higher than the number of children worldwide. This will be the first time in history. Will they be healthier? A combination of older people, who live longer, could present challenges such as a rise in age-related chronic illnesses and the concomitant increase in healthcare costs. Looking at it from a different viewpoint, will healthier living eradicate dread diseases and the need for medical cover?
While the money consumers spend on being healthy today will most likely benefit them in the future, they also need to consider their financial requirements should they live longer. Further, it will not be economically feasible for employees to retire in their early 60s (as most do now) if they are likely to live for close on 100 years. Put differently, employees are expected to live for longer after retirement compared to the number of years they worked before retirement. This will be too costly for the individual, for their families, and also for society.
While this global trend of living longer is positive, it has shifted the goalposts for retirement planning. The likelihood of extended retirement years means that individuals will need to find additional financial resources to see them through this period.
When planning around longevity, it’s crucial for people to consider the elevated levels of medical care and costs that they may face. More broadly, this leads into the conversation around the difference between "pensioner inflation" vs headline consumer price inflation. Targeting the latter is no longer sufficient for pensioners because the average price of their basket of goods and services differs from that of a working person.
Pensioners will need to ensure that the income drawn during retirement takes into account the possibility of a longer life. Not only can the normal costs of living spiral, but healthcare inflation in retirement will most likely swiftly outstrip the increases to which individuals would have been accustomed before retirement.
While inflation is not something individuals can control, actions to mitigate its impact will be vital. Investments to cover a longer life will need to outperform headline inflation (i.e. published CPI statistics) and must be carefully chosen.
According to experts, one of the biggest problems in retirement planning is being under-invested in growth assets. This is true for pre-and post-retirement investing
Liberty research has shown that another problem for pensioners is a basic understanding or level of education around their retirement products and choices. The great majority of pensioners surveyed indicates that they regret not asking more questions and investigating the different retirement products and features that were available to them when they retired.
This is where insurance and investment companies will need to tailor products and solutions which provide appropriate and proportionate exposure to various asset classes for such situations, as well as other potential risk-return sharing mechanisms embedded in traditional retirement products. The clear and transparent management of pensioners' expectations and understanding of the products are crucial focus points for product providers.
Guaranteed life annuities, which pay an income for as long as a policyholder is alive, will become more prevalent. The main use of these products is to provide retirees with a way to stretch their retirement resources to cover the possibility of living to a very old age.
Longevity insurance is not designed for the early retirement years and would form part of a holistic retirement plan. The benefit is generally paid in the form of a guaranteed income stream for the remainder of the individual's life, although alternative benefit forms may be provided depending on the terms of the actual policy. This guarantee offered around the policyholder income is costly and will increase even more over time as life expectancies are seen to increase.
While it may seem odd to insure against an event that most people would welcome, living a very long time would strain most people's financial resources. The logic that makes household insurance a sensible way of coping with the financial risk of damage or theft would seem to argue for greater use of longevity insurance for retirement planning.
Looking 15 to 20 years from now, not only will health insurance need to change to suit longer lifespans, but individuals will need to make careful investment and retirement choices to ensure that their finances live as long as they do. Liberty research shows that 90% of surveyed customers acknowledge the benefits and hence their preferences of guaranteed life annuities and would prefer the features they offer.
Yet industry statistics show that 90% of retirees who annuitise (i.e. excluding pensioners who took their full benefits in cash) choose traditional living annuities which do not provide any income guarantee and hence run the real risk that these policyholders will outlive their capital.
Living annuities are not bad. It is just that the ongoing investment and longevity risk-management requirements associated with them are not properly understood and acted on.
The paradox between pensioners' preferences and realised decisions illustrates the unfortunate drawbacks of insufficient retirement planning, education and saving levels which must be better addressed by industry, product providers and society as a whole in years to come.