Fat jabs are perhaps the largest development in healthcare since statins. Weight-loss drugs – or GLP-1s, as they’re properly known – will reduce the number of people having heart attacks, developing diabetes or getting cancer, and will generally let people live longer. With a population that’s two-thirds overweight or obese, it’s no surprise that already three million British adults are on the jabs. That’s twice as many as last year and the number is expected to double again by the end of 2027, according to consultants at PwC. Reinsurers such as Swiss Re say that weight-loss drugs could decrease all-cause UK mortality by as much as 5 per cent over the next 20 years. A health miracle, then. But one underexplored consequence is: what will it mean for pension providers if more people are unexpectedly living longer?
For those of us on defined contribution schemes, it is not really a problem: we have our pot of money, and that’s that. But for defined benefit (DB) schemes, which promise a set return until you die, it is worrying. The question nobody has quite answered is exactly how much that longer life is going to cost and who is going to pay for it. A rule of thumb is that every year of added life expectancy adds around 3 per cent to a DB scheme’s liabilities. Insurers have been watching for a while. Jeff Davies, Legal & General’s former finance director, said last year that the firm was ‘constantly monitoring’ the issue, but most big providers feel confident. Claire Altman, Standard Life’s head of pension risk, tells me that ‘the risk is managed’ for ‘dramatic improvements in life expectancy’.
Pension trustees, by contrast, have barely started looking. Last month, Standard Life published research saying that seven in ten DB trustees had not considered the effect that weight-loss drugs would have on life expectancy and pension payments, while nine in ten had not assessed how health innovations would affect their schemes’ liabilities in general. Although three-quarters of DB schemes are in surplus, it is exactly these surpluses that will start to erode if members live longer than the actuaries predicted. It is not a small market either: bulk annuity deals, where insurers take on scheme longevity risk, ran at nearly £40 billion last year and covered some 330,000 members.
The fiscal consequences of increased life expectancy are already visible in the state system. Last week the Treasury said it will raise the state pension age to 68 by 2037, seven years earlier than currently planned, affecting some five million people. Separately, the OECD told the government that reforming the pensions triple lock is ‘necessary to reduce fiscal risks’, warning that the triple lock has pushed state pension spending up faster than earnings for years. The Office for Budget Responsibility already thinks that state pension spending will rise from 5 per cent of GDP to 9 per cent by 2075. The government is aware that longevity will affect state pensions, but what about public sector pensions? After all, 92 per cent of people paying into DB schemes are in the public sector, and most of these payments come straight from government spending, so there is no real surplus to erode.
Unfunded public sector DB schemes, covering the NHS, teachers, civil servants and the armed forces, are the government’s second-largest liability after gilts, and currently stand at £1.4 trillion. Add the extra £550 billion for local government pensions, and the public sector is sitting on close to £2 trillion in DB pension promises. Every one of those promises assumes a certain number of years of payment. Every unexpected extra year of life is a year of payments nobody budgeted for. Therefore, a three-year increase in life expectancy might raise liabilities by as much as £180 billion.
A three-year increase in life expectancy might raise liabilities by as much as £180 billion
Yet the body responsible for pricing that risk has not really got around to doing the sums. In March, the Government Actuary’s Department published a report that named ‘new obesity drugs’ as one factor that could influence future mortality, alongside Alzheimer’s treatments and precision cancer medicine, but it did not model the effect. Neither, it seems, has the OBR. Its most recent public service pensions analysis is focused entirely on earnings growth and inflation assumptions, with no mortality-specific adjustment for GLP-1s at all.
Unfunded schemes currently pay out around £55 billion a year to pensioners, against £49.9 billion in contributions, a gap the Treasury tops up from general taxation. The OBR’s own central forecast has that burden easing, falling from 1.9 per cent of GDP now to 1.4 per cent by the early 2070s, but it is an optimistic trajectory that assumes payments keep being outpaced by earnings-linked contributions. It says nothing about what happens if many members simply live longer than the model assumes.
There may, of course, be fiscal upsides too. The benefits of GLP-1s should mean less government spending on cardiovascular and other health conditions linked to obesity. If public sector workers are living longer, they may also work longer. But there is a risk that, for Britain, a thinner waistline will come with a fatter pension bill.
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