Longevity risk in retirement – an academic and industry outlook
In the first major YAP Melbourne event of the year, Dr. David Knox, Senior Partner at Mercer and Prof. Johnny Li, award-winning Professor at the University of Melbourne, came together to discuss longevity risk and its impact on Australia’s retirement system.
Dr David Knox kicked off the session with a talk on the challenges of responding to increasing longevity. He revealed that a shocking amount of people underestimate their life expectancy due to misconceptions perpetuated by the press and financial advisers. For example, while the average life expectancy of a female at birth is 84.5 years, the average life expectancy of a white collar female at age 65, is 89.4. Over half the retirees with reasonable super are expected to live well into their 90s! It was appalling that the majority of Aussies actually do not have sufficient funds for their retirement, which is a result of over-optimism in government Aged Pension provision and lack of popularity of annuity-based products in Australia.
David then touched on the ‘retirement trilemma’ (a trade-off between adequacy, flexibility, and sustainability), the changes to the means test, and the current approaches of superannuation funds. David commented that there is a lot of work that superannuation funds and government need to do to educate retirees of their longevity risk. He left us with a revealing perspectives on the position of Australia’s retirement income system, and the opportunity for us to take a global lead in this space.
Prof Johnny Li followed up with an energetic presentation on stochastic mortality projection models. In particular, he gave a brief introduction to three models: the Lee Carter Model – that many of us are familiar with from our undergraduate studies; the Renshaw Haberman model; and the Cairns Blake Dowd (CBD) model. He also discussed that a ‘good’ model needs to meet both the quantitative and qualitative criteria. While most of us are familiar with the quantitative criteria for a good fit model from our studies, it was a good reminder to all of us that while the model makes statistical sense, we shall not overlook the biological reasonableness of the projected results.
Following these insightful talks was a Q&A from the audience. David and Johnny discussed the acceptance of academic research in the industry (and the incentives for companies to do so), how to combat the misconceptions of fund members around life expectancy, and the future of effectively communicating and educating members on longevity risk.
The night concluded with some food, drink, and casual networking.
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