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The Actuary The magazine of the Institute & Faculty of Actuaries
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Employers face at least £10,000 DB liability per worker per year

Low yields and greater longevity mean employers face defined benefit (DB) pension liabilities of at least £10,000 per member per year, according to an actuary.


5 JUNE 2015 | BY CINTIA CHEONG

Cancer cells © iStock
Cancer is now the focus when it comes to monitoring life expectancy. © iStock

Paul Kitson, actuary and partner at PwC, said there had been an increase of nine years in life expectancies in the past 35 years, which added up to £400bn to UK DB pension scheme liabilities over the period.  

Speaking at a pension conference in London organised by PwC, Kitson said the increase in life expectancy, in combination with low interest rates, created “the perfect storm”.

“In the world of high yields and high expected return we wouldn’t have minded so much, because it doesn’t add too much [to pension scheme liabilities],” he said.

In a high-yield environment, for every pensioner with a pot of £10,000, an extra year of life expectancy would cost an employer £5,000, said Kitson.

But in a low-yield environment, this would add at least £10,000 to the scheme. Kitson said: “In the world where we live with negative yields or no returns, an extra year of life expectancy for a member with a pension of  £10,000 per annum is another £10,000, or even more.”

Kitson also explained cardiovascular diseases used to be the biggest cause of death, but actuaries would now have to focus on cancer.

“We are now much better at combating cardiovascular disease, which was the weakest link, but this was dealt with very effectively. Cancer is now up there, so that’s where the focus is, on cancer,” he said.

In a separate point on pension freedoms, Philip Smith, head of defined contribution consulting at PwC, said drawdown would be the “predominant” method for people to access their pension but a significant number of people would still be interested in annuities.

“Annuity had a bit of a bad rep, probably because of the way they were sold in the past, but they are fundamentally for some people the right product. People will come to recognise that,” he said.