Better planning for longevity risk is essential

Improved life expectancy and lower mortality rates are expected to continue in India. The United Nations projects that life expectancy at birth will increase to 66.5 for the 2015-2020 period against 63.5 in 2005-10 and female life expectancy is estimated to be higher than those of males by 3.3 years during 2015-20.

An average Indian at age 60, which is the relevant figure for pensions and healthcare policies, is projected to experience 16.9 years of remaining life during the 2005-2010 period and 18 years during the 2015-2020 period, while females at age 60 will experience 2.1 years longer remaining life than males during 2015-2020.

The above numbers represent arithmetic mean, around which there is likely to be a large variance for different regions and sub-groups in India. Therefore, any pension and healthcare schemes, whether in public or in private sectors, should take into account specific demographic variables, including morbidity (i.e. disease patterns), and morality patterns of the members.

Any pricing or actuarial projections, based on an all India average by definition, will undermine credibility of pension or healthcare benefit promises. The request by the Insurance Regulatory and Development Authority (Irda) to the Life Insurance Council to rework new mortality tables using more comprehensive data, including mortality trends among the annuitants, is a small step in the right direction for establishing robust mortality databases.

Life expectancy in India may improve faster than projected, necessitating periodic reassessment of assets and liabilities.
The longevity risk is defined as the risk that future outcomes in mortality and life expectancy will turn out to be different than expected and accounted for in the scheme’s future assets and liabilities.

The importance of managing longevity risk in India becomes even greater as there is strong evidence that healthcare expenditure rise disproportionately with age; inflation in the health sector is expected to be substantially higher than average inflation, however measured.

By 2050, the UN projections are that the women and men over 70 years of age will be the first and the second largest population cohorts in India. Have the existing health schemes, whether in the private or in the public sector, taken into account such a relationship in their cost and other projections?

The LIC’s Jeevan Arogya (Plan No 903), a health insurance scheme, has benefits available till age 80. But as many will increasingly live beyond age 80, their health risks will also need to be managed. LIC’s Mediclaim policy has in principle life-time coverage. However, it is not clear to what extent such coverage is based on robust actuarial projections and whether it is financially sustainable, particularly if longevity trends surprise on the upside.

The public sector schemes, by Employee and State Insurance Scheme(ESIS) and civil service health benefits, should commission projection of their long-term assets and liabilities under different longevity assumptions by independent actuarial professionals and make them public.

There are three components in India’s pension and healthcare systems where better understanding and planning for longevity risks merits urgent consideration.

The first component concerns the civil service schemes. For reasons which are not entirely clear, internationally, civil servants exhibit among the longest life spans. In India, even currently it is not unusual for retired civil servants to receive pension benefits which are several times their last drawn salary, and for more years than their active service.

If health care costs, which rise disproportionately with age, are added to the pension costs, the combined pension and healthcare costs of those civil servants receiving non-contributory defined benefits (DB) pensions will be far higher than envisaged.
It is essential that cost projections of the civil servants under the DB schemes be undertaken on sound professional basis and be made available to the public.

These costs constitute a claim on the future fiscal resources of the centre, the states, and other public sector organisations. How these claims be met, and moderated to ensure that such claims by small proportion of the future elderly (civil servants account for around 4.5% of the total labour force) do not crowd out the needs of the other elderly.

The UN projects that by 2050, India will have about 330 million elderly, and all of them are already born. It should also be recognised that the allocation of resources for pensions have opportunity costs. Meeting pension promises should not crowd-out other needs.

The second component concerns Employees Provident Fund Organisation’s ( EPFO) EPS (Employee’s Pension Scheme). The EPFO must be required to make public the longevity assumptions on which its provident and pension scheme’s long-term assets and liabilities are projected and how the EPFO intends to meet them.

These should incorporate anticipated improvements in life expectancy for different cohorts, with provision for contingency that its members may live longer than anticipated. A similar exercise needs to be undertaken by the ESIS for its health schemes.

The third component concerns commercial type organisations, whether in the private or in the public sector. The PFRDA should be given the powers to require these organisations to project organization-specific longevity risks, to subject them to stress tests, and to prepare plans for meeting such risks. They should include public sector financial institutions, including the Reserve Bank of India; private corporations with DB plans; public organisations such as the Indian Railways, Indian Post, public sector banks and others.

The State Bank of India reported virtually zero profit for Q4 FY11, partly due to under-provision of the pension liabilities. Deteriorating finances of Indian Railways; and the previous communist-led West Bengal government exhibit revenue deficit in 2010-11 equivalent to 25% of its expenditure, even when no accrued pension liabilities have been included, suggests the scope of the challenge in addressing longevity risks.
India’s rapid ageing, due to increasing longevity trends and declining fertility, will constitute a challenge to policymakers not just in managing longevity risks, but also in terms of wider economic, social and political implications.

The mind-set of those managing provident fund and pension funds and policymakers need to change. Pension and healthcare initiatives must be accompanied by high quality analytical and actuarial projections, capacities for which must be nurtured.

The writer is a professor of public policy. (sppasher@nus.edu.sg) Views are personal.