UK - The increase in life expectancy assumption for members added £8bn (€10bn) to pension funds' liabilities last year, according to consultancy firm Mercer.

The £8bn increase, a total of 2% of pension scheme's liabilities at 350 of the largest listed companies in the UK, was the result of an average increase in assumptions of half a year over 2007.

Research also took mortality assumption for 30 companies grouped by industry sector, and found schemes in the manufacturing sector saw the most notable increase in people's life expectancy, as one scheme increased life expectancy for males by almost six years.

By comparison, two companies reduced the assumed life expectancy of some of their members, citing mortality investigations to justify the decision, according to Mercer.

The consultant expects an increase in mortality investigations in the future, given the Pension Regulator's encouragement of trustees to use realistic and justifiable mortality assumptions.

Looking at funding positions for the companies, Mercer also found scheme funding levels on an IAS19 basis improved over the first quarter of 2008, as an aggregate FTSE 350 surplus rose to £14bn compared to a deficit of £14bn at the end of last year.

The buyout position estimated for the FTSE 350 has remained stable since the end of 2007, at £80bn.

Overall, Mercer found the allocations to equity investments are typically down 57%, given the relative market movements.

But the consultant warns recent market turmoil has presented data which confuses the true picture of pension scheme funding because while equity markets have fallen, corporate bond yields have continued to rise, resulting in a widening of the spread between corporate bond yields and gilt yields.

According to John Hawkins, principal in Mercer's Financial Strategy Group "the IAS19 figure reflects the increase in corporate bond yields over the period - the consequential liability reduction has more than offset the fall in asset values."

Hawkins cautions the true picture may be less rosy: "On some measures, the yield increase is less significant, and the position is vulnerable to a re-rating of corporate bonds and a reduction in credit spreads as confidence and liquidity recovers."

Proposed changes to accounting bases by the Accounting Standards Board (ASB) would give rise to much higher stated deficits, estimated to be £170bn in aggregate - this would be higher than the current buyout deficit estimate, added Hawkins.

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