Playing The Longevity Game
By Padraig O'Hannelly |
4 July 2008
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We're living longer, and this is a problem for pensions and the NHS. The longer we live, the longer our pensions have to support us, and the more money will have to be spent on keeping us healthy.
According to data from JP Morgan's LifeMetrics, the life expectancy of a British 65-year-old has increased by approximately two years over the ten year period from 1996 to 2006.
| | Female | Male |
Life expectancy at age 65, in 1996 | 82.86 | 79.41 |
Life expectancy at age 65, in 2006 | 84.54 | 81.78 |
Predicting how these life expectancy figures develop in future is arguably the biggest challenge in the pensions industry. Estimates vary as to the cost, but for each additional year of average life-span, something of the order of £15bn to £40bn must be added to the pension pot to support it -- annuities cost more if you live longer.
A recent chat about these figures inevitably led to the question: “How can we make money from this trend?” Along with the obvious investment candidates such as pharmaceutical companies and healthcare providers, a more direct suggestion was a straightforward bet on reaching the age of 100.
The first such bet to pay out in UK was in 1994, the bet having been place eleven years earlier at odds of 100-1. That's over 50% per annum compound! And if an 89 year old woman could get odds of 100-1, surely the odds against a 40 year old man reaching that iconic age must be huge?
Salivating, and with dollar signs in my eyes, I decided to check it out. Paddy Power (LSE: PAP) wouldn't quote a price for it, but William Hill (LSE: WMH) immediately responded with odds of 60-1. How disappointing! That works out at only 7.1% annually if you win -- similar to what you could expect from the stock market, but with your money tied up for sixty unpredictable years.
I guess the bookies are getting fed up of people living to be 100. And besides, these are novelty bets, placed as much for their entertainment value as for financial return. But I think perhaps I've gleaned as much entertainment value as I can from this already, so will stick to more traditional forms of investing.
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