Don’t push too far, industry warns

Pensions professionals are questioning the need for the Pensions Regulator\'s call for schemes to adopt more generous life expectancy assumptions.

The Pensions Regulator life expectancy assumptions could add £50bn to UK plc’s pensions deficit say KPMG, which argues most companies have already taken big steps towards strengthening their occupational schemes.

Last month the Pensions Regulator published a draft statement on the regulation of defined benefit pension schemes that set out a new approach to looking at mortality assumptions.

It is worried that mortality assumptions are too weak and do not allow for future improvements in longevity. KPMG says on average UK companies have a life expectancy estimate of 86 years for a current 65 year old, 3 years below the regulator’s recommendation.

Tony Hobman, chief executive of the Pensions Regulator says: “Over the past couple of years there have been significant developments in our knowledge of trends in mortality. It is the regulator’s view that some projections that have been in common use can no longer be considered reasonable assumptions. We wish to bring these developments to the attention of trustees and outline how they should go about deciding on funding assumptions for defined benefit schemes.

Mike Smedley, pensions partner, KPMG says: “Wholescale adoption of these guidelines would amount to an increase in pension liabilities of a further 10 per cent on top of a £45 billion increase already factored in by companies over the three years to December 2007.

“Our research based on 31 December 2007 year end accounts suggests that less than 10 per cent of UK companies currently follow the regulator’s recommended approach for their company accounts, which typically mirror the approach used for cash funding valuations – so more than nine out of ten will have to make radical changes.

“Today’s announcement goes far beyond what we were expecting the regulator to announce and indeed goes further than the actuarial profession has done to date by attempting to set a minimum standard for life expectancy. We would question whether this is really necessary as many companies feel they already have sufficient prudence in their assumptions overall.”

Joanne Segars chief executive of the National Association of Pension Funds says: “The Pensions Regulator and the Government will need to tread carefully if the new period of stability in occupational pension provision is to be more than just a temporary phase. Any increase in costs must be offset by lighter regulation to help keep existing defined benefit schemes open. “Examples of lighter regulation include making it easier for surpluses to be returned if people do not live as long as expected or giving employers leeway to increase newly promised pensions by less than inflation if life expectancy rises much faster than expected.”