The new Continuous Mortality Investigation (CMI) model, CMI 2017, could reduce a pension scheme’s liabilities by between 0.5% and 1%, compared with the previous version of the model CMI 2016, according to Aon estimates.
The 2017 CMI model is adjusted to include lower than expected levels of mortality improvement in England and Wales, based on data up to the end of 2017; it reflects lower than expected improvements in national mortality over the last six years.
The lower mortality improvement rate means the new model typically will produce lower life expectancies and hence lower liability values compared with previous versions.
Thus the 2017 and 2018 data so far is expected to “place further downwards pressure on longevity reinsurance prices and have a positive impact on bulk annuity and longevity swap premiums,” said Matthew Fletcher, senior longevity consultant at Aon.
Fletcher said; “The post-2011 trend of lower improvements continued through 2017. It is no longer credible to claim that this is a blip – longevity specialists who have found reasons to treat each new year of heavy mortality data as somehow a ‘one-off’ may now have some difficult explaining to do.
“The longevity markets have also now recognised that the post-2011 experience was not a ‘blip’ and are reflecting more recent trends.”
RBC Capital Market analysts noted that CMI 2016 substantially underestimated the deaths in 2016 by 4%.
The UK mortality rates in 2017 overtook 2015 as the worst year for deaths since 2003 and as UK life insurers’ models are updated to more accurately reflect current trends, more responsive models could result in greater reserve releases, RBC said.
Fletcher continued; “While mortality improvements for pension scheme members have also fallen broadly in line, our analysis at Aon suggests that they have not fallen to the same level as for the general population. All else being equal, simply being a member of a defined benefit pension scheme has positive life expectancy implications!
“Trustees and sponsors need to consider carefully how to adjust the CMI model to obtain mortality improvements assumptions that are appropriate for their pension scheme. It is important that this adjustment is based on data and sound principles.
“At Aon, we have developed a robust methodology that takes explicit account of each scheme’s socio-economic profile, while automatically remaining consistent with the pattern of improvements observed nationally.”
