UK - The Pension Regulator's decision to introduce a new funding 'trigger' based on mortality assumptions could increase pension liabilities by at least £75bn (€100bn), Aon Consulting has revealed.

TPR has published draft guidance that sets out a new approach for trustees looking at mortality assumptions when setting a recovery plan, which includes that assumptions should be "evidence-based and clearly and transparently described". (See earlier story: TPR to introduce mortality funding 'trigger')

Following an initial analysis of recovery plans in September, TPR has stated recovery plans based on valuations dated after March 2007 will be subject to further scrutiny if:

The mortality assumptions appear to be weaker than the long cohort assumption
Assumptions are based on a rate of improvement tending towards zero, and they do not have some form of underpin Tony Hobman, chef executive of TPR, said: "It is the regulator's view that some projections that have been in common use can no longer be considered reasonable assumptions.

"We wish to bring these developments to the attention of trustees and outline how they should go about deciding on funding assumptions for defined benefit (DB) schemes. Scheme members living longer adds to the cost of pensions and it is right that schemes recognise this in their funding," he added.

But Aon Consulting said the Regulator's consultation was "surprising" as it is published just weeks before the end of a consultation by the Actuarial Profession's Continuous Mortality Investigations (CMI), which highlights final salary pension scheme members do not live as long as insurance company data would suggest.

As a result, Marcus Hurd, senior consultant and actuary at Aon, said if companies were to adopt TPR's proposed assumptions, then 99% of companies would need to strengthen their assumptions. 

He warned: "The effect would be to increase the UK's reported pension liabilities by at least £75bn immediately. As the Regulator is assuming that the average 65-year-old pensioner retiring today will survive for a further 25 years until age 90 rather than age 85 as currently assumed by most companies.

"This is a knee-jerk reaction to a long-term issue. Even if TPR is right, then companies have a further quarter of a century to solve the problem. In addition, providing retrospective guidance for valuations after March 2007 is unhelpful," he added.

Although he admitted there is a need for most companies to review mortality assumptions, the best approach is for trustees to take a specific approach in their own mortality assumptions rather than a generalist approach.

"Such unnecessary regulation could restrict the ability for companies to provide the best protection for their scheme members and result in a herding effect amongst companies. This is a clear signal that TPR is more concerned with protecting the Pensions Protection Fund (PPF) than the survival of final salary pension schemes," claimed Hurd.

Watson Wyatt also expressed concerns the new triggers could become a standard for scheme funding, as it warned "mortality risks remain very unpredictable and nothing in the Regulator's guidance can change that".

James Wintle, senior consultant at Watson Wyatt, said: "If trustees think that by complying with the new trigger points they protect themselves against these risks then they are going to be in for a surprise; we just don't know whether that surprise will be good or bad."

For a typical scheme Watson Wyatt estimates moving to the long cohort improvement factors could increase pension liabilities by around 5% compared with the medium cohort assumption, which is the most common for valuations completed recently.

"Mortality really is scheme specific and too prescriptive a trigger will not fit that very comfortably," added Wintle.

The consultation will close to submissions on May 12 2008.

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