Press release

Chapter 3. Sustainable Income (SI) investing - Is longevity really an issue?

06/12/2019

This is one of a series of 8 chapters which we hope will stimulate thought around the difficult issues that people may face while investing in retirement. Spire Platform Solutions does not provide advice and does not advocate any particular investment solutions.

In the previous chapter of our look into Sustainable Income (SI) investing we explored the impact of adding an annuity to an income drawdown portfolio to manage Longevity Risk. In this chapter, we’re going to take a look at just how big the risk of living for a very long time actually is.

So, for the non-actuaries reading this, there are three key points to understand:

  1. The older you are the higher your life expectancy.
  2. When talking of life expectancy, it is an average so you have a 50% chance of outliving this.
  3. People typically underestimate both their life expectancy and the possibility of living to a very old age.

Here are a few facts that may help to bring to life just how many people are now living into their 90s and beyond:

  • In 2017 there were 579,776 people aged 90 years and over living in the UK, including 14,430 centenarians.*
  • The 90 years and over population continues to increase despite a decline in births in England and Wales 90 years ago (see graph below).*
  • The number of centenarians has increased by 85% over the last 15 years.*

*Source: Office for National Statistics, National Records of Scotland, Northern Ireland Statistics and Research Agency


So, the reality of potentially living for a very long while is extremely real and the need to manage this should be one of the most important factors when looking at SI investing.

In the previous chapter we looked at how ‘blending’ an Annuity together with an asset backed portfolio helps mitigate this Longevity Risk. Blending will ensure that the pensioner has a degree of guaranteed lifetime income no matter how long they live for, whilst also benefitting from exposure to an investment portfolio where they could potentially see significant returns.

The level of this guaranteed income is bespoke to the individual and probably only pays for essential and regular spending e.g. utility bills, food etc. This allows for the more lifestyle spending such as holidays to be funded by an investment portfolio when the portfolio is performing well.

In summary, people normally underestimate both their life expectancy and the chance of living much longer than average. Therefore Longevity Risk is a real factor to consider carefully when developing an SI investment strategy.

By Adrian Boulding - Chief Innovation Officer at Spire Platform Solutions.