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The Actuary The magazine of the Institute & Faculty of Actuaries
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FTSE 100 companies face £26 billion longevity gap

FTSE 100 companies are in danger of sleepwalking into reporting an unnecessary £26 billion in pension liabilities in their accounts, according to Hewitt Associates. Hewitt says the additional amount relates to the differing assumptions used by companies and trustees in predicting the life expectancy of the members of UK’s largest defined benefit pension funds. On average, FTSE 100 companies currently assume a life expectancy for a 60-year-old male of around 86 years in their annual accounts, while trustees of the same schemes are working on the assumption of an 88-year lifespan.

While companies are required to report a ‘best estimate’ for their financial accounts, trustees are required to use a ’prudent’ approach for the purposes of scheme funding valuations. The differences between the two sets of assumptions highlights the challenges that schemes and sponsors face when predicting life expectancy, and the impact this can have on a company’s financial health.

Martin Bird, head of longevity solutions at Hewitt Associates said:
"The life expectancy of scheme members is one of the most critical risks currently facing companies with defined benefit pension schemes, particularly as people are living longer. Companies need to take an independent look at their longevity assumptions to avoid adding in layers of inadvertent costs."

Calculations by Hewitt show that for every year that member life expectancy increases, scheme liabilities rise by between three and four percent. Therefore, if FTSE 100 companies just adopt assumptions in line with trustees, as they have done historically, it would add a further £26 billion to their collective liabilities.

The news comes at a time when the FTSE 100 is facing its largest ever collective deficit of £75 billion and when many of the UK’s largest companies are trying to manage and reduce their pension scheme risk.

Matt Wilmington global risk management specialist at Hewitt Associates said:
"Longevity is climbing up the risk agenda as companies and trustees have started to realise the potentially massive implications of a longer life in retirement. It now rates in the top three pension risk concerns of trustees alongside equity volatility and interest rate risk."

Earlier this year Babcock International completed the first ever longevity swap when it secured a deal for fixed payments for a finite term to a third party, in exchange for the actual value of pensions due to members - regardless of how long the members and their dependents live. Hewitt now expects the longevity swap market to see a minimum of six deals over the next year, with a total value of over £5 billion.