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The Actuary The magazine of the Institute & Faculty of Actuaries

Half of FTSE350 firms failing to address longevity increases

Fifty-seven of the 118 companies researched by the longevity advisory firm kept their assumptions static, although figures from the Office for National Statistics show that male life expectancy at age 65 is increasing by over three months each year.

In contrast, the remaining 61 schemes made an increase to their assumptions for male life expectancy of nearly half a year on average. Among schemes that made increases, the average adjustment was 0.4 years. This will have added around £700m to disclosed liabilities, and would have a £5bn impact if replicated across the whole FTSE350, Club Vita says.

Some schemes have gone further - four FTSE350 company schemes have increased their assumptions for male life expectancy by over one year during this period, in recognition of the continued rise in life expectancy. A further eight schemes have increased their assumptions by one year.

Top 4 life expectancy assumption increases - based on 2010 Accounts

Company Male pensioner LE - Increase in years Male pensioner LE - percentage increase
Wolseley 2 10.0%
Britvic 1.9   9.5%
Reckitt Benckiser Group 1.8   6.9%
Land Securities Group 1.2   4.2%

Andrew Gaches, longevity consultant at Club Vita (pictured), said: "Longevity continues to be the biggest unmanaged risk for pension schemes. For every extra year that a pension scheme's members live, they face an increase in liabilities of approximately 3%. That's a significant increase, and one that companies need to be aware of and keep on top of sooner rather than later.

"While it's encouraging to see some schemes getting to grips with rising life expectancy, there is still a worrying lack of action from many others. Longevity is going to keep increasing and schemes need to keep up with this. Otherwise they risk a substantial bump in the road down the line as they run into a large, unplanned-for increase in their liabilities.

"Some schemes could also face a second blow if they have used inaccurate longevity assumptions when designing a liability driven investment strategy. This illustrates why longevity risk cannot be thought of in isolation. Schemes need a broader risk management strategy in place, and accurate longevity assumptions very much need to be a part of that.

While the vast majority of schemes either increased or maintained their assumptions, five FTSE350 schemes actually reduced their projections for how long their members will live:

Bottom 5 life expectancy assumption increases - based on 2010 accounts

Company  Male pensioner LE - Increase in years Male pensioner LE - percentage decrease
 Marston's -0.1 N/A
 Hays -0.4 -1.8%
 Ashtead Group -0.9 -3.9%
 Astra Zeneca -1.1 -4.6%
 London Stock Exchange -1.5 -5.4%

There were also significant variations in changes to life expectancy assumptions between different industry groups. Cyclical consumer companies collectively made some of the largest increases to their assumptions, increasing these by 0.25 years on average. At the opposite end of the spectrum, industrial companies collectively increased their assumptions by just 0.10 years:

Industry sector  Male LE - Increase in years
Consumer, cyclical 0.25
Finance 0.18
Consumer, non-cyclical 0.15
Industrial 0.10

Mr Gaches added: "It may at first appear worrying that some schemes are reducing their life expectancy assumptions, and could be taken as evidence that schemes are packing away bad news for the future. There may be a logical reason for this however, particularly if a scheme's membership is heavily biased towards a particular region, demographic or other variable.

"What this does highlight though is that every scheme is different. Relying on generic assumptions fails to give an accurate picture of the unique profile of each scheme, and we're increasingly seeing unique nuances within individual schemes. This may well be why these schemes have made downward revisions - as the unique nature of their scheme comes to light.

"It's a similarly complex story with regards the different industry sectors and some people may be surprised that the financial industry increased its longevity assumptions less than cyclical consumer industries. It's worth remembering though, that as well as there being many well-paid workers in finance, there are also a large number of lower-paid employees in this industry, for example some retail banking clerks and back office staff."