UK - Stronger longevity assumptions included in financial reporting, particularly by financial services companies, has increased pension costs by £40bn (€50bn) over the last three years, KPMG has revealed.
Research from the firm showed the average life expectancy for current pensioners has now increased from 83 in 2004 to 86 in 2007, but many companies are now assuming current employees will live even longer to an average of 87 years.
However, KPMG claimed 2007 was a "good year to bury bad news on pensions" as while performance of pension assets was "not spectacular" the liquidity crisis resulting from the credit crunch meant AA-rated corporate bond yields - used to discount liabilities - increased by 70 basis points.
Mike Smedley, partner at KPMG, said as this caused many companies' underlying pension liabilities to fall by more than 5%, it allowed improved life expectancy assumptions to be "absorbed without significant pain to the balance sheet".
But despite this strengthening of assumptions, KPMG said it "might not be enough to satisfy The Pensions Regulator (TPR)" if its proposals for a mortality funding "trigger" are adopted following the current consultation. (See earlier IPE article: Industry criticises TPR mortality trigger)
KPMG said the research showed despite the improved assumptions, only 2% of companies are using the mortality projections proposed by TPR in its draft guidance and as a result, it estimated, the UK could face a further £40bn pensions shortfall if they adopted TPR's proposals.
Mike Smedley, partner at KPMG, said: "Taken at face value, the regulator's guidance suggests that it believes life expectancy will increase indefinitely. The fact that only 2% of companies agree with this view suggests TPR has taken a step too far.
"Many companies think that the Regulator has overstepped its remit and that it should not be the industry standard-setter on mortality assumptions," he added.
That said, KPMG claimed the "credit crunch" has also had a positive effect on the pensions buyout market, as prices fell significantly because of both the increased bond yields that insurers can obtain and fierce competition.
In addition, the firm said these changes coupled with companies moving closer to insurers' assumptions for life expectancy, "makes buy-out an increasingly affordable option" for pension schemes.
Smedley added: "Using insurance solutions is now a much more realistic option for many companies looking to de-risk or even completely offload their pension scheme liabilities."
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