Pension funds face a shortfall of billions

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UK companies face having to add billions of pounds to their pensions liabilities under plans to be unveiled by the regulator to force them to use more realistic projections of how long workers will live after they retire.

The standard the Pensions Regulator is to propose next week is tougher than that used by 99.5 per cent of UK schemes and will increase stated liabilities for companies by 6 to 8 per cent, even for those already adopting the most prudent standard now in use. For roughly a third of all schemes, the increase in disclosed liabilities will be as much as 15 to 20 per cent and could force them to set aside more cash to fill shortfalls.

The regulator has the power to order weak companies to increase contributions to their final salary scheme. It also has the power to intervene on behalf of trustees if the regulator feels that companies are not putting in enough money to close gaps in their pension schemes.

The regulator is concerned that companies making insurance-like promises are ignoring scientific evidence showing longer lives at older ages. As a result, insurers and employers may not be putting away enough cash to pay annuities and pensions in full.

Last summer, the actuarial regulator and a key insurance industry group warned that the most conservative standard now used by pension schemes for forecasting life expectancy, a table known as PA92 Medium Cohort, had fallen so out of line with actual experience that it could no longer be viewed as prudent.

“What we are saying is that while longevity is impossible to predict, we do believe that schemes are underestimating how longevity will continue to improve in the future,” said Charlie Massey, executive director at the Pensions Regulator.

The regulator is to issue a discussion document suggesting that scheme funding plans will “trigger” special scrutiny if they use a mortality assumption less prudent than one known as PA92 Long Cohort – which at present would add about two years to assumptions of male life expectancy.

It will also expect schemes to use forecasts that assume life expectancy improvements will not suddenly stop short at some point in the future, but will continue, albeit at a slower rate.

Officials have indicated that though it is a consultation document, they expect to drive it through with only limited changes.

In general terms, the proposed standard for those retiring today at 65 assumes that men – the overwhelming majority of those in final salary schemes – will live to at least age 89, roughly two years longer than the presumption in more than half of current UK company schemes.

Every additional year of life expectancy increases liabilities by 3 to 4 per cent.

Mr Massey says the regulator believes that by issuing new guidance it will help trustees to better understand how life expectancy is forecast because it proposes that each scheme actuary present information in a common way.

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