You may have read today about the story of Alec Holden, who ten years ago bet £100 on himself that he’d live to 100. William Hill offered him odds of 250-1, and he’s now celebrating a £25,000 win. It seems that old age hasn’t dimmed Mr Holden’s wit – the secret is apparently not to worry about anything, do as little work as possible and go on lots of holidays (and in recent months he’s been keeping watch for “any hooded groups from William Hill standing in the street”).
Interestingly, William Hill has now slashed the odds on the same bet from 250/1 to 10/1, which is a good indicator of how life expectancy has changed over just one decade. When it comes to pension funds, companies have been far too slow at upwards revising life expectancy over the past few decades, and this has very serious consequences for the bond market. If workers’ ages are being systematically underestimated (and there is no doubt that they are – see Jim’s note here from last November), then companies are grossly underestimating their future pension fund liabilities. Pension fund deficits are therefore significantly bigger than current estimates suggest.
The only way to fund this shortfall is for pension funds to dramatically increase exposure to long dated assets. Long dated bonds and long dated inflation-linked bonds will be the biggest beneficiaries, and this is why I believe the UK yield curve will invert further.