Everlasting life adds £6bn to pension costs

The NHS, cheap gym membership packages and Jamie Oliver’s healthy eating drive all have a lot to answer for. British workers are living longer and leading to longer mortality assumptions for UK company pension schemes, creating as much as £6bn in additional liabilities.

According to much-covered research from actuary company Watson Wyatt, about ten out of 21 schemes it looked at had changed their mortality assumptions in the past year to account for longer life spans among the British. What this obviously means is that funding company pensions will become more expensive, which some speculate could lead to schemes failing.

The report says that those who had revised their life expectancy numbers upped their predictions by an average of 16 months – while those retiring in 15 years’ time had their life expectancy rates lengthened by an average 21 months. The increase cost of providing for these increases in pension liabilities ranged from 2.5% to 6%, or about £6bn altogether.

Watson Wyatt’s senior consultant Nicola van Dyk says, “Reducing uncertainty is high on the agenda for companies and their advisers trying to manage the financial risks inherent in their defined benefit pension schemes. Longevity risk is a significant one; so is investment risk, as the impact on pension scheme assets through recent market volatility has shown.”

A fortnight after Watson Wyatt published its findings, The Pensions Regulator issued a consultation paper on setting levels for pension liabilities using existing mortality assumptions. It found that there were many variables that made assumptions fairly wide – from wide variability from person-to-person, year-on-year, and long-term trends in age-specific populations. The regulator’s consultation with the pensions world will be closed by mid-May.

On top of all this, the liability valuation proposals from the Accounting Standards Board could add as much as another £100bn to reported liabilities, says van Dyk, though she added that talk of their implementation was still mostly speculation.

“The longevity changes are, by contrast, concrete… and reflect an expectation of increased real cost of benefits due to members living longer, rather than a change in the approach to measurement."
www.watsonwyatt.com