Multi billion pound black hole threat to UK pension liabilities

20 February 2008 / by Verity G
British company pension schemes are facing a deficit of at least £75billion as Brits live longer than ever before, according to a report released yesterday by The Pensions Regulator.

The watchdog has found that many firms with final salary schemes have been underestimating life expectancy of members by around two years, adding around five per cent to current pension liabilities.

Now the draft statement on the regulation of defined benefit pension schemes has set out a new approach to looking at mortality assumptions after it was discovered that many companies will be left with substantial pension shortfalls. The news could see those workers heading for retirement having to pay sizeable contributions to their own funds if they are to avoid financial hardship in their twilight years.

The widespread assumption has been that an average worker retiring at the age of 65 will live to the age of 90, not to the previous estimate of 85, and with each increment of two years, workers and companies will need to find an additional five per cent in additional funding.

Chief Executive of the Pensions Regulator, Tony Hobman comments: "Over the past few years there have been significant developments in our knowledge of trends in mortality. It is the regulator’s view that some projections that have been in common use can no longer be considered reasonable."

This is the latest blow for the UK pensions sector which has been struggling to regain the multi billion pound deficit incurred in recent years.

Despite an improvement from the £200m in 2006 to £52.9 billion surplus last year, the most recent industry survey conducted by the Pensions Regulator revealed that almost 64 per cent of schemes were in deficit, with a combined shortfall of £34.4 billion. This figure is expected to rise considerably under the new longevity guidelines.

The National Association of Pension Funds (NAPF) Chief Executive, Joanne Segars, comments: "The Pensions Regulator and the Government will need to tread carefully if the new period of stability in occupational pension provision is to be more than just a temporary phase. The pressure valve cannot continue to be tightened so any increase in costs must be offset by lighter regulation to help keep existing defined benefit schemes open.

"Examples of lighter regulation include making it easier for surpluses to be returned if people do not live as long as expected or giving employers leeway to increase newly promised pensions by less than inflation if life expectancy rises much faster than expected."

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