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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.”

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