Mercer report shows pension longevity assumptions rising

by Artemis on August 4, 2010

Longevity risk and the assumptions surrounding the age that pensioners will live to are big news today. The market in longevity risk transfer is growing rapidly this year with some very large deals taking place and new entrants beginning to show an interest in hedging their pension longevity exposure.

This morning both the BBC News and the UK’s Guardian are carrying news articles regarding longevity risk assumptions. The story has emerged thanks to a study by Mercer which has shown that the pension plan liabilities faced by the UK’s 100 largest companies has increased by about 1.5% in the past year driven by the increased life expectancy of pension plan members.

The FTSE 100 firms (the largest 100 publicly listed UK firms) increased their assumptions of life expectancy for the purpose of calculating their liabilities by an average of six months.

“Accounting assumptions really make a difference to the assessment of a company’s pension liabilities,” said Warren Singer, UK head of pension accounting at Mercer. “Rising life expectancy continues to have serious financial implications for pension schemes.”

The study by Mercer also found that the average life expectancy of a pension plan member aged 45 has increased by two years, meaning pension plans really need to be budget to pay pensioners for two extra years very soon.

A separate report from actuaries LCP has found that FTSE 100 companies have had to make record contributions to their pension funds in order to fill black holes that would equate to shortfalls. In 2009 firms paid in £17.5b, double what they paid in the year before.

All this suggests that companies need to start investigating ways to increase their pension funds and also hedge the risk of plan members living longer. We expect to see many more pension longevity risk transfers in the coming years.

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