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09

Mercer: life expectancy increases add pressure to DB liabilities

Open-access content Tuesday 30th September 2014 — updated 5.13pm, Wednesday 29th April 2020

Trustees of defined benefit pension schemes are constantly increasing the life expectancy of their members, adding millions to the cost of maintaining the schemes, Mercer has claimed.


30 SEPTEMBER 2014 | BY JUDITH UGWUMADU

The consultants estimated that, for each month of increased life expectancy, DB schemes with £100m in liabilities would see this figure increase by about £300,000.

Its 2014 Valuation survey highlighted that DB trustees are assuming that, on average, the life expectancy of a 65-year-old male would increase from 22 years and 10 months to 23 years and 4 months reaching age 88 years and 4 months. Women aged 65 are assumed to live an additional 23 years and 4 months to a total average age of 90 years and 6 months, Mercer said.

It claimed a scheme with £100m in liabilities would need to find an additional £1.8m to cover the cost of ageing.

Mercer partner Deborah Cooper said: 'Member longevity is one of many critical risks impacting the financial health of a DB pension scheme, but it's very hard to anticipate with any confidence. It's possible there is no end in sight to the increases.

'Whether the money to pay for the increases comes from asset performance or company contributions, it's a further ratcheting up of the financial pressure on companies as their exposed to risks stretches over a longer period. Consequently, trustees and employers need to look for ways to manage the financial consequences of increased longevity.'

Given the financial impact of increased longevity, Mercer's survey examined how schemes were approaching risk management more broadly.

According to the survey, schemes were adopting a combination of strategies. The most popular option (92%) was to close the scheme to new entrants. This was followed by monitoring funding quarterly - or more frequently - and the closure of the scheme to future accrual (both 60%).

More than half (57%) were reviewing their investment strategy, 54% had increased the regularity with which they monitored its promise, while 38% were considering using contingent assets.

Cooper added: 'Historically, valuing pension schemes was done triennially - with more approximate reviews being carried out annually - but as DB schemes have become a more onerous burden, this has proved insufficient for many sponsors and trustees. 

'It's encouraging to see that over 54% of trustees are saying that they are monitoring their funding level at least quarterly - 8% do it on a daily basis, so are able to react more quickly to market changes. However, that still leaves a large proportion of schemes where risks are not actively managed.'

This article appeared in our September 2014 issue of The Actuary .
Click here to view this issue

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