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The Actuary The magazine of the Institute & Faculty of Actuaries

Slowdown in improving life expectancy could cut pension deficit by £28bn

A new mortality projection model released three days ago could result in £28bn being wiped off pension liabilities for FTSE350 businesses, according to analysis by Mercer.

Longevity is a major risk for schemes ©Shutterstock
Longevity is a major risk for schemes ©Shutterstock

It’s Pension Risk Report, published earlier this year, showed that the deficit of defined benefit (DB) pension schemes for these companies was £137bn in December last year.

However, an ‘unprecedented rise in deaths’ caused the Continuous Mortality Investigation, to reduce life expectancy at 65 by around 1.3% for males, and 2% for females, which could now see many schemes’ liabilities cut.

“There’s some debate about exactly why this has happened. Some point to the strain in the UK’s health and care system, caught between an ageing population and budget cuts,” Mercer principal, Glyn Bradley, said.

“On the other hand, this winter’s excess mortality in the UK isn’t noticeably worse than for our European neighbours. What does seem to be occurring across the northern hemisphere is that winter flu has started comparatively early, starting in December in the UK.

“This means the calendar year 2016 could catch significant parts of two winter flu outbreaks, rather just one. Hospital admissions, for example, appear to have peaked in mid-January, whereas in 2016 they didn’t peak until March.”

The new CMI_2016 model was updated from the previous one to include mortality data up to and including 2016, as a starting point for projecting life expectancy.

Most trustees and sponsors of UK DB schemes use a version of the model to estimate how long members will live, with the data based on the populations of England and Wales.

However, Mercer UK head of risk transfer, Andrew Ward, said: “From a pension scheme perspective, this new data is still only a snapshot. It’s possible that population experience isn’t completely representative of average pension scheme membership, and some significant risks remain in a world where an extra year of life expectancy can add 5% to liabilities.

“Longevity is a major risk that few schemes have addressed in any way. However, as a minimum, all companies and trustees should seek to better understand the risk that longevity uncertainty poses to their financial health as well as the options available to remove this risk.

“This is particularly relevant as schemes develop their longer term plans either for a lower risk run-off or full buy-out.”

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