In his annual letter, BlackRock CEO Larry Fink stressed the need to find solutions to the concerns Americans face when they plan for retirement. \u201cWe focus a tremendous amount of energy on helping people live longer lives. But not even a fraction of that effort is spent helping people afford those extra years,\u201d Fink wrote.<\/p>\n
Most public pension funds in the U.S. are underfunded, according to research from the Equable Institute, which released a \u00a0State of Pensions 2023 report that said the average funded ratio for public pension funds was 78.1% at the end of 2023. In the U.S., there are $1.44 trillion in unfunded public pension liabilities, according to the Equable Institute. These pension obligations are the biggest liabilities for state and local governments in the U.S.<\/p>\n
Americans are also living longer, and many public pension funds do not have sufficient assets to cover their long-term liabilities Iit may take decades for some funds to reach a fully funded status. Illinois plans for its five state pension systems to be fully funded by 2048, and the California Teachers\u2019 Retirement System, which expects to be fully funded by 2046.<\/p>\n
The issue of longevity risk, as highlighted by Fink and by the Equable Insitute\u2019s \u00a0report stresses the need for pensions to ensure that their funds can meet their long-term liabilities in a time when Americans are living longer than before.<\/p>\n
The life expectancy for adults in the U.S. has risen from age 68.14 in 1950 to 79.2 in 2023, according to the U.N., which projects life expectancy to increase to 88.78 in 2100.<\/p>\n
Advancements in medicine, including some ambitious projects seeking to extend the lifespans of humans and other mammals means that life expectancies could continue to increase \u201cNot only are people [in the U.S.] living longer today, but life expectancies are very likely to continue to improve in the future. And so now, at least with public pension plans, it\u2019s routine, that when we are looking at life expectancy, we\u2019re building in an explicit assumption that longevity will continue to improve going forward,\u201d says Rebecca Sielman, principal and consulting actuary at Milliman.<\/p>\n
Americans living longer, combined with public pension plans that are underfunded, pose challenges for these allocators.<\/p>\n
Adapting to Longevity<\/strong><\/p>\n Longevity risk, the effects of pension beneficiaries living longer than expected puts pressure on the funded status on a plan and increases contribution rates.<\/p>\n \u201cIf on average, members live longer than what is projected by the mortality rates used in the actuarial valuations, the cost of benefits increases. This results in downward pressure on funded status results and upward pressure on contribution rates,\u201d the California Public Employees\u2019 Retirement System wrote in an annual review of risks report.<\/p>\n Longevity is not a major contributor to these unfunded liabilities, says Anthony Randazzo, executive director at the Equable Institute. \u201cWhen we look at data for the specific causes of today\u2019s $1.4 trillion in unfunded liabilities, demographic factors like retirement patterns and mortality simply are tiny contributors relative to other factors like underperforming investments or contributions being less than interest accruing on the pension debt.\u201d<\/p>\n Randazzo says that longevity risk is more of an issue for funds that have severe underfunding and high levels of negative cash flow, although longevity risk in this situation is still low on a list of worries that a fund would have.<\/p>\n Longevity risk is baked into the calculus of how pension plans calculate liability, Sielman says. \u201cThe amounts that plan sponsors are paying into the pension plans are higher as a result, so they\u2019re setting aside more money now, knowing that people are going to be living longer and collecting more benefits in the decades to come.\u201d<\/p>\n Professor Gordon L. Clark of Oxford University says that defined benefit plans should \u201clook at a much broader set of asset classes and a much broader set of investment instruments.\u201d<\/p>\n One effect of longevity risk is that funds might allocate more to higher-risk asset classes, like some alternatives. Public DB plans with higher longevity risk may tend to allocate more to risky asset classes, according to a paper\u00a0from LGIM.<\/p>\n criticized pension funds for increasing allocations to riskier asset classes. \u201cIn order to achieve high returns, pension funds have accumulated a large exposure to risky assets, which results in volatility and a large dispersion in possible future investment returns,\u201d the paper stated.<\/p>\n A spokesperson for BlackRock suggests that public pension funds facing longevity risk could consider increasing their allocations to fixed income assets, due to the current higher interest rate environment.<\/p>\n Modern medicine has contributed to the steep increase in human longevity over the last century, however, some researchers and practitioners believe human longevity can be extended even further. A number of researchers are exploring pharmaceuticals that promise to extend the lifespans of animals, and later humans.<\/p>\n One such company is Loyal, a startup that aims to achieve regulatory approval for its medication that aims to increase the lifespan of larger dogs. The company has begun its clinical trials, called and expects to offer<\/p>\n David Sinclair, a researcher at Harvard Medical School whose lab had reversed aging in mice and is now working on the technology in primates, suggests that the human lifespan can be increased to\u00a0150 years in the long term.<\/p>\n While living to 150 may be a stretch, the possibility that more Americans could live lives far out into their 100s is not zero, and a future that many public pension funds should anticipate, even if it takes a century to get to that point. While pension funds do think about longevity risk, extensive longevity promised by speculative technology is not baked into how these pensions approach risk.<\/p>\n \u201cThere are certainly a number of promising medical advances that could lead to a rapid increase in human life spans. How quickly those breakthroughs come\u2014and how available they will be to individuals outside the top ends of the socioeconomic ladder\u2014are speculative enough at this point that no pension fund is overly concerned with trying to design an adaptation just yet,\u201d Randazzo says.<\/p>\nLongevity Pharmaceuticals<\/h2>\n