The UK’s aggregate defined benefit (DB) deficit could be overstated by as much as £25bn (€29.1bn) due to inaccurate longevity data, according to Hymans Robertson.
The consultancy’s longevity specialist arm, Club Vita, likened the inaccuracy to continuing to pay benefits for up to four months after the recipient had died.
Douglas Anderson, founder of Club Vita, warned trustees and sponsors could be taking “an unnecessarily prudent approach” to longevity assumptions.
“It could be distorting important decisions on the future strategy of their schemes,” Anderson said.
Using data such as an employee’s final salary and their postcode could provide a more accurate idea of their life expectancies, Anderson added.
“Under the traditional approach, you don’t know whether a typical £5,000 annual pension relates to a long-serving, low-salary person or a short-service, high-salary person – two people would have very different life expectancies,” he said.
Club Vita claimed its data has helped reduce its clients’ liabilities by 1% on average.
“Naturally, the ultimate cost of a pension scheme will be determined by how long its members actually live,” Anderson said. “But assumptions made today really do matter for such long duration commitments. The confidence that trustees gain from more insightful longevity assumptions does change behaviours, affecting members’ benefits, their security, and businesses’ ability to invest.”
Elsewhere, the trustees of the British Steel Pension Scheme (BSPS) rejected a restructuring plan proposed last year by a leading UK financier to keep the scheme out of the Pension Protection Fund (PPF).
According to an update from the trustees, Edi Truell last year presented them with a plan to alter the risk exposure of BSPS’ portfolio and negotiate government-backed hedges against inflation and longevity risk.
Truell is a former chairman of the London Pension Fund Authority and a founder of Pension Insurance Corporation.
Under the proposals, Tata Steel – the scheme’s current sponsor – would have continued to pay contributions, despite the company’s desire to sever its ties to BSPS.
The trustees described the plan as “unsolicited proposals”, and rejected it as it would “would expose members to unacceptable risk”.
“Mr Truell’s proposals were dependent on co-operation and commitments from government and Tata Steel, corporate and financial transactions with third parties, and approval by the Pensions Regulator,” BSPS said. “Mr Truell was unable to demonstrate that there was any reasonable prospect of these things happening.”
According to newspaper reports, Truell’s foundation and Disruptive Capital Finance, a venture capital firm he runs, would have taken responsibility for managing the £15bn scheme, had it been approved. This would have involved the institutions taking a share of outperformance, according to BSPS.
Truell was unavailable for comment when approached by IPE.
BSPS’ future was thrown into doubt last year when Tata Steel announced its intention to sell its UK business. In December it reached a deal with unions to maintain and invest in its plants, but the agreement is reliant on the company’s ability to cut ties to the pension scheme.
The trustees are currently negotiating with the Pensions Regulator about how this may happen. While the scheme could go into the PPF – it would be by far the largest fund to do so – the trustees maintain that the scheme is well funded and can be self-sufficient.
Tata Steel is due to make its final two deficit recovery payments of £60m and £65m in March 2017 and March 2018, respectively. These are unaffected by the ongoing consultation regarding closure of the scheme to future accruals.
Earlier last year, BSPS reported a shortfall of £1.5bn, but this was almost completely offset by investment gains over the summer to just £50m on a technical provisions basis as of mid-October.
Meanwhile, the Alcatel-Lucent Pension Scheme has concluded its second buy-in in just over a year, transferring £100m of pensioner liabilities to Pension Insurance Corporation (PIC).
It follows a £300m deal announced in January 2016, which was backed by Aviva.
Uzma Nazir, head of origination structuring at PIC, said: “As we have seen, trustees, such as those for the Alcatel-Lucent Pension Scheme, who have moved to lower risk assets over a number of years are now able to complete buy-ins to enhance security. After a very busy few months in the market, we expect this clear trend to continue for the foreseeable future. We are proud to have been able to help the trustees to efficiently de-risk.”