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The Actuary The magazine of the Institute & Faculty of Actuaries

Flawed longevity assumptions could be adding extra £25bn to DB pension deficits

Defined Benefit (DB) pension scheme’s trustees are assuming people will live four months longer than they actually will, which could be over inflating their collective deficit estimates by £25bn, according to longevity specialist Club Vita.

Longevity management moving higher up schemes’ agendas ©Shutterstock
Longevity management moving higher up schemes' agendas ©Shutterstock

The firm argues that more money than necessary is being directed towards plugging these deficits, which, along with low interest rates, has the potential to force some DB schemes into closing.

This comes after it was reported yesterday that UK wages could be 6% higher if money put towards reducing the deficits of DB pension schemes was redirected towards workers’ pay.

Club Vita founder, Douglas Anderson, said: “With rock-bottom interest rates causing pension deficits to swell, trustees and sponsors of DB pension schemes need to avoid unnecessary margins in assumptions.

“Companies with schemes facing record funding deficits in 2017 valuations will be feeling the heat. They, and scheme trustees, should look at whether they’re taking an unnecessarily prudent approach.

“It could be distorting important decisions on the future strategy of their schemes.”

Club Vita’s analysis suggests that there are three main reasons for these over-estimations: out-of-date data, unrefined estimates that don’t take the individuals into account, and a natural behavioral bias to err on the side of caution.

It is thought that trustees have been deterred from implementing longevity management due to the high costs it can entail, but Anderson believes this is beginning to change.

He continued: “Rightly, we have seen longevity management move higher up schemes’ agendas. With DB schemes maturing and investment risk being dialled down, longevity is now a bigger risk than ever before.

“Fortunately, hedging out the uncertainty in future longevity trends may be more affordable than many trustees think. This is particularly relevant now that longevity insurance is available to smaller pension schemes.

“Until fairly recently, insurers were only confident to offer attractive prices to the biggest schemes, but that’s now starting to change.

“Given a combination of increasing costs of longevity risk and improved access in the market, we expect many more schemes to take proactive steps to manage longevity risk in 2017.”