FTSE 100 companies could face up to an extra £26bn of unnecessary pension liabilities due to differing life expectancy valuations, according to Hewitt.

The consultant has said that a 'longevity gap' exists where different assumptions are used by companies and trustees when predicting the life expectancy of members in the UK's largest defined benefit (DB) pension schemes. The average FTSE 100 company currently assumes a life expectancy for a 60-year-old male of around 86 years, while trustees of the same schemes predict life expectancy of around 88 years.

Firms should therefore not just adopt their scheme's longevity assumptions, as they have done in the past, as scheme funding and accounting rules call on companies and trustees to take different approaches to longevity assumptions. Companies are required to report a 'best estimate' for financial accounts, whereas trustees use a 'prudent' approach for scheme funding valuations.

"The life expectancy of scheme members is one of the most critical risks currently facing companies with defined benefit pension schemes, particularly as people are living longer," commented Martin Bird, head of longevity solutions at Hewitt Associates. "Not only does it impact scheme valuations significantly and, therefore, the amount the sponsor is required to contribute to the scheme, but it also has a direct impact on the company's accounts.

"In the current environment it is vital that companies do not sleepwalk into a potentially costly and inappropriate set of assumptions by simply following the trustees, as they have done in the past. Companies need to take an independent look at their longevity assumptions to avoid adding in layers of inadvertent costs."

Hewitt has calculated that for every year a member's life expectancy increases, scheme liabilities rise by between three and four per cent. Therefore, keeping in line with trustees' assumptions would add a further £26bn to collective liabilities.

Matt Wilmington, global risk management specialist at Hewitt Associates, added: "Longevity is climbing up the risk agenda as companies and trustees have started to realise the potentially massive implications of a longer life in retirement. It now rates in the top three pension risk concerns of trustees alongside equity volatility and interest rate risk. As companies start to realise the implications of increased life expectancy on their financial health, they are working with trustees to identify means of managing - or entirely removing - this risk."

Share Story: