Guest Comment: Slowing longevity and its impact on pensions

Every two years, the Royal Dutch Actuarial Association publishes a model that estimates life expectancies for men and women in the Netherlands. This model also provides the mortality table that is used for Dutch pension calculations and a method to generate scenarios for future survival probabilities.

In the most recent estimates, the increase in life expectancy has been adjusted downwards to an average of 89 years for men and 92 years for women. Future improvements in survival rates have been taken into account in the calculations.

Slower rise in retirement age and lower technical provisions are expected

The Dutch pension system consists of three pillars. The first pillar is the state pension, and the age at which those payments start depends on life expectancy. It is currently 67 years and it is now expected to rise to 67 years and three months around 2030.

In the second pillar, which consists of occupational pension schemes, the update has led to a decrease in pension technical provisions of approximately 2.5 per cent for average interest rate levels at the end of 2019. For the individual pensions that are found in the third pillar, increased benefits at the start of the retirement period are expected.

Inclusion of European data leads to stable trends

The model uses Dutch data and data from European countries with a comparable level of prosperity, such as the United Kingdom, France and Germany. As a result, the prognosis is based on a dataset that contains about two million deaths per year, which enhances the stability of the estimates over time. In our model, Dutch life expectancies are expected to converge to long-term European trends eventually.

Any European country with comparable prosperity can use our approach, when its data is added to the common European dataset. In Belgium, a very similar method has already been implemented. The effect of Covid-19 has not been included yet, but preliminary sensitivity analysis indicates a possible further decline.

It is not yet possible to fully include the impact of Covid-19 in our forecasts. There are still too few datapoints available for 2020 and the impact in different European countries varies considerably.

As a first indication of the possible impact, a sensitivity analysis has been performed, based on data from the Netherlands, Belgium, the United Kingdom, France and Germany. We looked at two possibilities. In the first analysis, only the effects of the coronavirus wave in the spring is taken into account.

The second study estimates the impact of a possible doubling of that effect due to developments in the rest of 2020. In the first case we find a reduction in remaining life expectancies of 0.44 years for men at age 65 and 0.19 years for women of that age.

In the second case the impacts grow to 0.87 years and 0.33 years respectively.
When more data becomes available, it will be possible to provide better estimates for such effects.

More information can be found on the mortality table here.

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