UK - A life expectancy increase of two years could add £45bn (€57bn) to the liabilities of UK defined benefit (DB) pension funds, according to a report produced by the Chartered Institute of Management Accountants (CIMA).

The report, entitled Apocalyptic demography? - Putting longevity risk in perspective, and published in association with the Pensions Institute at Cass Business School, warns unprecedented increases in life expectancy could undermine the financial viability of DB funds.

"Defined benefit pension schemes promise specific levels of payouts to retired members, putting the investment risk on the shoulders of the companies which run them," reads the report.

The Pensions Regulator estimates that two years of extra life could add up to 5% to a defined benefit pension liability - with liabilities across UK pension schemes adding up to around £900bn - a move of 5% would equal £45bn.

Authors David Blake, director of the Pensions Institute at Cass Business School, and research fellow John Pickles, argue UK life expectancy has nearly doubled over the past 150 years increasing by 2 to 2.5 years a decade on average, exceeding official projections.

Commenting on the report, David Blake said interest rate or inflation risk are generally perceived as bigger risks in the pension scheme, but can be hedged these using Liability Driven Investment (LDI) strategies such as duration and inflation swaps.

"If finance directors do nothing to hedge this risk [of longevity], they leave themselves exposed to cures for cancer and other medical advances extending the lives of plan members in a way that was not anticipated or reserved for when those members retired," said Blake.

Charles Tilley, chief executive at CIMA, said: "While multinationals and other larger FTSE100 companies are alive to the risks posed by longevity issues, it is typically smaller to medium organisations that may not realise quite how seriously life expectancy assumptions can impact upon their balance sheets."

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