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Mortality changes add £6bn to FTSE100 liabilities

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  • Mortality changes add £6bn to FTSE100 liabilities

UK - Nearly 50% of the defined benefit schemes in the FTSE100 changed their mortality assumptions over the last year, adding more than £6bn (€8bn) to pension scheme liabilities, Watson Wyatt has claimed.

Analysis of the provisional disclosures of 21 of the 55 FTSE100 companies with 2007 calendar year-ends, revealed 10 changed their mortality assumptions to allow for increases in longevity.

The consulting firm claimed this impacted liabilities by between 2.5% to 6% as, on average, the schemes increased longevity predictions by 16 months, while even higher increases of 21 months are expected for members scheduled to retire in 15 years' time. 

As a result, said Nicola van Dyk, senior consultant at Watson Wyatt, if the analysis is extended to apply to all the DB schemes in the FTSE100 the change to the assumptions would have cost just over £6bn in 2007.

She suggested the changes were "an injection of realism at a time when many companies felt able to afford it" as reducing uncertainty is a high priority for firms trying to manage the financial risks inherent in DB schemes.

"They shouldered the additional cost of building in changed mortality assumptions in a year when asset returns were generally good and bond yields - which have a major impact on liability calculations - were at a high level," van Dyk added.

Watson Wyatt's estimate of the cost of the changes follows proposals put forward by the UK Accounting Standards Board (ASB) to change the way assets and liabilities are calculated, which consultants claimed could increase DB liabilities by between £80-£120m a year. (See earlier IPE story: ASB changes will "fast-forward" demise of defined benefits)

However, van Dyk said: "While it has been suggested these ASB proposals could add around £100bn to reported liabilities, it is speculation as to whether they will be implemented and when."

"The longevity changes are, by contrast, concrete and in the here and now, and reflect an expectation of increased real cost of benefits due to members living longer, rather than a change in the approach to measurement," she added.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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