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The Actuary The magazine of the Institute & Faculty of Actuaries
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Jump in longevity assumptions adds to FTSE100 scheme liabilities

The increase is estimated by Mercer to add approximately 1% to scheme liabilities.

Mercer's report showed that FTSE 100 companies had increased their UK longevity assumptions by about three months for current pensioners and by about five months for future retirees compared to the previous report as at 31 December 2009.

On average, male scheme members aged 65 are now expected to live until age 87.2, while those currently aged 45 who survive until age 65 are expected to live until age 89.2. This represents an increase of about two years in life expectancy from Mercer's December 2006 report, highlighting that companies believe life expectancy has improved faster than previously expected, which has added to pension costs.

Mercer's annual pension accounting assumptions survey investigates the accounting assumptions for FTSE 100 companies and shows diverse views about the future on the key UK assumptions of price inflation, investment returns and life expectancy.

The report shows the general expectation amongst the FTSE 100 is that pension costs have increased, as longer life expectancy and lower bond yields have led to a higher cost of providing each £1 of pension. The median long-term expected rate of return on scheme assets fell by 0.2% p.a. during 2010. This suggests that, with companies anticipating less return on their scheme's investments, a greater proportion of pension costs will need to be met by contributions rather than investment returns.

The data also showed a wide range of inflation assumptions, with company assumptions for long-term RPI inflation varying from 3.1% p.a. to 3.7% p.a. The difference between these inflation assumptions could change the pension liabilities by around 10% for a typical UK scheme.

There also continues to be a diversity of opinion as to the long-term expected investment return from equities, which vary from 6.5% p.a. to 8.9% p.a. in published disclosures. This difference currently affects the reported profit of companies irrespective of actual investment returns achieved.

The amended International Accounting Standard 19 (IAS 19) will change this and increase reported pension costs for most FTSE 100 companies due to the replacement of the expected return on plan assets with a net interest charge based on the discount rate.

Warren Singer, UK head of pension accounting at Mercer, said, "Investors, analysts and users of financial statements need to consider why different companies have adopted different assumptions and the impact that these differences have on reported liabilities and profits. Amendments to IAS 19 due to be adopted from 2013 will require expanded disclosure information and should make it easier for users of financial statements to understand pension accounting disclosures".