UK - More than a quarter of UK pension schemes are planning to switch to a long cohort mortality projection for their mortality assumptions, potentially increasing life expectancy by almost two years, suggests research from Mercer.

Findings from the consulting firm’s latest valuations survey showed the median life span used by pension funds for active and deferred members has increased by 11 months from 88.2 years to 89.1 years.

The median scheme life expectancy for active and deferred members has also increased from 23.2 years to 24.1 years, as Mercer suggested trustees are reacting to both longevity improvements and The Pensions Regulator’s (TPR) decision to place more focus on mortality assumptions.

However, results of the valuation survey - based on schemes with a valuation date of between December 2007 and March/April 2008 - showed a “substantial increase” in life expectancy assumptions for active and deferred members, though the changes were less pronounced for current pensioners.

This is because more schemes are planning to switch to the long cohort mortality projection from the more commonly-used medium cohort, and 27% of the 196 respondents expect to use these assumptions in valuations compared to 3% a year earlier.

Although TPR has delayed plans to introduce a mortality funding trigger, which is based on long-cohort mortality assumptions, Harry Sime, principal and leader of Mercer’s valuation and funding group, said trustees are continuing to fund their plans by assuming greater life expectancy for their members. (See earlier IPE article: TPR mortality delay ‘too late’ for some funds)

He said: “TPR’s proposals on the use of an additional mortality trigger have had an impact as has the influence of analysis based on membership data.”

Findings also showed 48% are planning to introduce underpins to the rate of improvement - another element highlighted by TPR in its consultation on changes to longevity assumptions - up from 40% a year earlier.

Mercer revealed the effect of moving from a medium cohort to a long cohort projection is an increase in life expectancy of around 21 months, while changes to the underpins could result in an increase in longevity of up to three years.
Sime said: “The trend towards higher life expectancy assumptions is expected to continue with this being achieved by greater use of underpins and more adoption of the long cohort projection basis. A key objective for trustees is to be able to justify the assumptions they have used; noting that their approach should be both evidence-based and prudent.”

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