Falling short | 4 January 2018

Hedge funds have already spotted it: Jim Mellon’s latest book, Juvenescence, reviews the new science that will lengthen our lives by 20 years. Through regeneration (stem cell) and repair (DNA) technologies, we’ll soon be living healthily and happily to 110 or more. How soon? Who knows. But the repercussions will be enormous. Major insurance companies will go bust; speculators will make a fortune shorting them; 90-year-olds who bought annuities will become destitute when their annuity provider fails; there will have to be a total rethink of the nation’s state pension age.

The annuity recipients; those without savings; company pension funds (many of which are already in negative cash flow): all will be in trouble. But nowhere will the impact be so great as in our public-sector pension schemes.

Private-sector schemes are funded. Most public-sector ones are not — there are no underlying assets to meet the pension promises, which have to be financed on a pay-as-you-go (PAYG) basis, out of general taxation. Their unfunded net liabilities now total more than £1.3 trillion. Some 15 per cent of public-sector pensions are funded, but with assets of £266 billion compared with liabilities of £370 billion. Combined liability — £1,425 billion, 75 per cent of GDP — is up 26 per cent since 2010. That’s before adding in quasi-public schemes (such as the Universities Superannuation Scheme, the deficit of which near doubled last year to £17.5 billion).

Public-sector pension fund beneficiaries in their sixties are forecast to receive some 20 years of pension before they die. With luck, actuaries have overestimated current longevity by about three years, so before any longevity increase there may, on average, only be 17 years of future payments to make. But what happens if the longevity revolution adds a further 20 years of life? The pension liability actually almost doubles.