The number of British people who die every year went up to about 530,000 in 2015, and that’s good news for investors in the stock of companies with pension-fund deficits, according to Gordon Aitken, an RBC Capital Markets equity analyst. The increase in the number of deaths rose from a low of about 485,000 deaths in 2011.
It is important to be clear that Aitken was not celebrating those deaths. Rather, in a July 7 note to investors, he was explaining how the death rate affects companies that are required to pay more cash into their under-funded pension plans.
When old-fashioned “defined benefit” pension plans fall into deficit, they are sometimes required by The Pensions Regulator or the Pensions Protection Fund to increase the cash payments to make up the gap. Those increased cash payments leave less money for stock dividends, earnings on the bottom line, or investment in future growth.
Unfunded pension deficits are a growing problem, especially as the Bank of England just lowered the interest rate. Pensions are often funded by gilts and bonds that rely on interest payments. So the BofE’s decision will likely worsen the pension “black hole,” Aitken’s note says. The total deficit of the roughly 6,000 British companies that have unfunded pension liabilities is £408 billion, according to the PPF.
However, the fact that British people are dying more numerously — and thus claiming less of their pensions — will have a positive effect on pension funds, Aitken wrote:
Importantly the increase in death is heavily skewed to older ages
Note it is the increase in deaths at older ages (mostly post retirement) which would impact pension schemes positively. Any change in deaths at earlier ages is less relevant as pension benefits are typically only provided post-retirement.
Here’s a chart:
We are dying more because life expectancy for men has fallen by two months, and “the expectation of life at age 65, which is relevant for insurers, has fallen 4 months,” Aitken says. Dementia and Alzheimer’s are driving the increased death rate.
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