MORTALITY PROJECTIONS: WHO CARES? STEPHEN RICHARDS

Copyright (c) 2004 Prudential plc. All rights reserved. 2 LONGEVITY RISK IN THE U.K. Where it sits Occupational pension schemes Individual annuities Bulk annuities Guaranteed Annuity Options (GAOs) Lifetime mortgages

Copyright (c) 2004 Prudential plc. All rights reserved. 3 LONGEVITY RISK IN THE U.K. Scale of liabilities “If you can actually count your money, you are not really a rich man.” J. Paul Getty ( ), oil magnate

Copyright (c) 2004 Prudential plc. All rights reserved. 4 LONGEVITY RISK IN THE U.K. Scale of liabilities U.K. insurers wrote £7.4bn of new annuities last year 1 Prudential has £17bn of annuity liabilities 2 U.K. life insurers have £70bn 2 Public-sector pension schemes have £580bn 3 Occupational pension schemes have £762bn 4 1 ABI, 2003 figures excluding bulk annuities. 2 “Financial aspects of longevity risk”, Richards and Jones, SIAS, Watson Wyatt press release, August GAD (2000), Eleventh Survey of Occupational pension Schemes.

Copyright (c) 2004 Prudential plc. All rights reserved. 5 LONGEVITY RISK IN THE U.K. Scale of liabilities  Company nameSize of pension scheme 1  Vodafone Group1%  Liberty International2%  Land Securities3%  Rolls Royce 199%  ICI 352%  British Airways 899% 1 Size of pension scheme relative to market capitalisation. Lane, Clark and Peacock Annual Survey, End-2003 figures

Copyright (c) 2004 Prudential plc. All rights reserved. 6 LONGEVITY RISK IN THE U.K. Uncertainty “The trouble with the world is that the stupid are cocksure and the intelligent full of doubt.” Bertrand Russell ( ), philosopher

Copyright (c) 2004 Prudential plc. All rights reserved. 7 LONGEVITY RISK IN THE U.K. Uncertainty in future projections Source: Projection of GAD population data with fitted spline model (linear penalties by age and year of birth) 2019 for 65-year-old  immediate annuitant 2039 for 45-year-old deferred annuitant 

Copyright (c) 2004 Prudential plc. All rights reserved. 8 LONGEVITY RISK IN THE U.K. The cost of uncertainty Uncertainty over future improvements has a cost. The 75% lines represent a cost of 4% of an immediate annuity Graph implies there is a 12% chance that uncertainty could cost at least 4% …but equally there is 12% chance that profit margin could be nearly doubled Source: Immediate level annuity to male aged 65, population mortality from 2004, using 75% confidence intervals on P-spline projections (linear penalties on age and year of birth).

Copyright (c) 2004 Prudential plc. All rights reserved. 9 LONGEVITY RISK IN THE U.K. Summary Colossal longevity liabilities in U.K. private sector Profit very sensitive to longevity (not just insurers’ profits!) Increased focus on mortality projections

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