Pensions regulator softens stance

The Pensions Regulator rowed back on its proposals to require schemes to use assumptions about life expectancy that could have required them to add billions of pounds in additional funding.

In February, the regulator proposed a system of reviewing the funding plans of company pension schemes that would “trigger” a close scrutiny of the plan when it used an assumption that is lower than that used by much of the insurance industry when it makes similar types of promises.

That move was prompted by a growing body of evidence that people are living longer. Moreover, the evidence shows that the trend is not levelling off – the basis of the formula used by most pension actuaries – but actually accelerating.

In 2007, the Board for Actuarial Standards and a key insurance industry group urged a change to a formula that adds as much as two years to life expectancy. Each extra year of life expectancy increases liabilities by 3-4 per cent.

However, in guidance published yesterday, the regulator dropped plans to have the longevity assumption on its own trigger close scrutiny of funding plans. Instead, it will review the assumption to be used in the context of other similar assumptions.

But in guidance to trustees, it made clear that it still expects them to build in an assumption of a minimum amount of improvement in old age life expectancy and it expects them to be conservative in the way they reserve for longer life.