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The Actuary The magazine of the Institute & Faculty of Actuaries

New angle on mortality data cuts costs for STV pension scheme

The review, led by independent financial advisers LEBC Group, involved the development of bespoke software to more accurately predict the average life expectancy and health profile of members, will enable the company to significantly reduce its pension costs.

The 12-month process, which saw LEBC contacting the scheme's 800 pensioners and 200 deferred members, secured strong support, with some 66% participating in the review. By understanding the overall shape of its members' life expectancies, the scheme has been able to apply meaningful mortality assumption in place of national averages.

Nick Flynn, longevity director with LEBC Group, said: "This ends the guessing game around scheme mortality by actually establishing the health of the membership. It benchmarks those individuals against the enhanced annuity underwriters and providers and confines today's postcode-based approach to history. Ultimately, this approach provides actuaries with a far more accurate base of evidence from which to base future assumptions."

According to LEDC, the review has seen a reversal of the annuity rate in much the same way as if a person retiring in poor health would receive a higher annuity. It effectively reverses annuity rates to create a mark to market price, which can then be used to work out the specific life expectancy of the membership.

"This is a sensible move for trustees and members, which addresses the cost concerns of the company and the governance issues faced by trustees," says Flynn.

"Pension scheme regulation has placed increasing obligations on trustees and they have been fully supportive of this review from the outset. While the outcome is neutral for pensioners and future beneficiaries, the strong participation is an indication of their backing of the wider principles of strengthening the scheme."

The analysis tools developed by LEBC enable companies to assess future scheme liability. The firm says it has completed seven reviews to date, saving companies an estimated £12 million. According to research carried out by the company, if such reviews were carried out across the FTSE250, some £1bn of liabilities could be removed from companies' balance sheets.

Jack McVitie, chief executive of LEBC Group, said: "Organisations are increasingly looking to identify effective ways to fund future scheme liabilities and, in the current financial climate, many are even finding it hard to secure the cash required to pay their ongoing scheme contributions. The early signs are that this is a much-welcomed contribution by companies looking to manage its future defined benefits scheme liabilities in a cost-effective and prudent manner."