Pension schemes raise life expectancy assumptions

Pension schemes have increased their life expectancy assumptions for members by an average of half a year over 2007, according to Mercer's most recent pension funding research. This, according to the consultant, equates to an average increase of 2% - £8 billion - on the liabilities for FTSE 350 firms.

The report, which looked at funding positions for FTSE 350 companies, also showed scheme funding levels on an IAS19 basis improving over the first quarter of 2008, with an aggregate FTSE 350 surplus of £14 billion compared to a deficit of £14 billion at December 31st 2007.

The "buyout" position remains similar to the position at December 31st 2007, currently estimated for the FTSE350 at £80 billion. As expected, given relative market movements, allocations to equity investments are typically down to 57% on average.

However, John Hawkins, principal in Mercer's Financial Strategy Group, warned that recent market turmoil presented data that confused the picture of pension scheme funding. While equity markets have fallen, corporate bond yields have continued to rise, resulting in a widening of the spread between corporate bond yields and gilt yields.

Mercer has cautioned that the proposed changes to accounting bases by the Accounting Standards Board will give rise to much higher stated deficits, estimated to be £170 billion in aggregate.

The research also took a snapshot of the mortality assumptions for 30 companies grouped by industry sector. Of those companies, 12 recognised significant improvements in life expectancy for a current pensioner over the previous year.

Schemes in the manufacturing sector saw the most notable increase. In one case the increase in life expectancy for males was almost six years. The data also showed that in a reversal of the current trend two companies have reduced the assumed life expectancy of some of their members - both citing mortality investigations to justify their decision.

An increase in mortality investigations is to be expected given the Pension Regulator's encouragement of trustees to use realistic and justifiable mortality assumptions.

Hawkins, added: "Further improvements in life expectancies are still anticipated, although increases in liabilities are not likely to be restricted to this factor alone.

"Deficits on the actuarial bases typically used by trustees to set contributions are still increasing, despite falling accounting deficits, so there is potential for additional cash flow strains for companies even if their disclosed accounting position appears to have improved.

15 May 2008 © Moneyextra.com

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