Whether we are actuaries or not, those of us in the pension business might need to take seriously a recent scientific study that suggests that individual life expectancy can be more accurately predicted through DNA sampling.
The implications could be earth-shaking, and may require an overhaul of the whole premise of pensions and investing, as well as traditional actuarial work generating studies of group life expectancy and mortality tables that are the very basis of that profession.
How well is your pension fund covered when measured against forever?
The study published in July by the Proceedings of the National Academy of Sciences is co-written by Wen-Chi Hsueh, assistant professor in the department of medicine of the University of California, San Francisco. Reduced to the basics, her research included suggestions that lifespan is measurable by the length of so-called telomeres that cap the ends of chromosomes and can be derived from DNA samples.
As a result, it should be possible to predict individual life expectancy, absent vagaries of accidents and unhealthy lifestyle practices. Whether we would personally want to know the information is another issue, but given the increasingly effective invasion of privacy in our modern world, there is a distinct likelihood that it will become common knowledge and also create a moral issue, similar to the current dissension over prenatal parental decisions or an individuals health profile for insurance or employment purposes.
For those of us in the pension fund industry, the more arresting concept of the study is the predictive value of the telomere length as a biomarker for survival.
More than half of all American retirees take their Social Security payments at the earliest opportunity, age 62. The retirees actions can be explained by the need for the money now but also the fear that they will not be long-lived. This early action should be an accurate predictor of baby boomers behavior regarding their more complex defined benefit and defined contribution choices, with significant implications for actuaries and plan sponsors. With better information, we could see fewer lump-sum redemptions and more annuity options, which should ease an otherwise accelerating overall funding burden but at the expense of increasing future funding requirements.
Happier retirees could lead to less litigation especially with the looming specter of lawsuits stemming from bad 401(k) investment choices and the prospect of creating indigent retirees as a result of their exhausting their retirement assets. Litigation would also be reduced through better informed choices in 401(k) drawdown scheduling, survivor spousal allocations, lifestyle fund choices and other estate planning. The biggest casualty could be the mortality tables, where the short-lived effectively subsidize the longer-lived. With both parties making correct choices, the cost of defined benefit plans could dramatically increase, as would all forms of life insurance.
Of course, the stress of knowledge of our own life expectancy might bring us to an early grave, and other actions may shorten it. But the temptation to live like the control group for Ms. Hsuehs study members of the Old Order Amish community, who welcome visitors to Lancaster County, Pa., with their horse-drawn buggies, eight-mule plowing teams and quaint modes of dress is not a great prize to be welcomed. In spite of their stable lifestyle no cigarettes, no alcohol, reduced stress and a healthy outdoor farming life the life expectancy is a comparatively modest 71 years. Many of us can believe we could beat that but do we want to know for sure?
The reason for the telomere phenomenon is believed to be a defense against cancerous tumors that endlessly replicate themselves by cell division. By limiting the total number of divisions, the telomeres protect the human organism, but at the price of longevity. Longer telomeres mean longer life expectancy, but all are gradually shortened until mortality ensues. Some cancers defeat this mechanism by creating enzymes that repair the telomeres. In a real medical flight of fancy, if scientists were able to replicate those enzymes without the cancer hosts, they could promise unlimited telomere repairs and, therefore, immortality. Actuaries who have problems with the prospect of predictable life expectancy can put it in perspective with that thought. What kind of assumptions should pension funds use to measure forever?
John Woods Conlin is principal of Conlin Associates, Chadds Ford, Pa., a consulting firm that advises money managers in the institutional market on business and product development, marketing and other areas.