Falling life expectancy results in 1-2% liability decrease for FTSE 350 schemes

Falling life expectancy has resulted in a 1-2 per cent reduction in liabilities for FTSE 350 pension schemes, new analysis from Hymans Robertson has revealed.

In its latest IAS19 Assumption Report published today (11 July), the average pensioner life expectancy is on average 0.2 years lower than 2017, highlighting a considerable number of companies reporting a fall in life expectancy.

The report tracks trends of FTSE 350 companies, which combined support £700bn of DB liabilities with a combined market capitalisation of £2,300bn, reporting their defined benefit pension liabilities on an IAS19 accounting basis.

Commenting, Hymans Roberston head of corporate consulting, Alistair Russell-Smith, said: “Most companies are continuing to report falls in disclosed life expectancy. On average disclosed life expectancies are 0.2 years lower this year, equating to a 1-2 per cent reduction in liabilities.

“A note of caution is that the standard tables are based on population data, whereas our Club Vita analysis shows different patterns of longevity improvements amongst different socio-economic groups. Using the standard tables unadjusted does therefore risk understating life expectancy.”

The consultancy also noted the impact that GMP equalisation was having on in FTSE 350 liabilities, with a 0.5 per cent increase on average, while 73 per cent of the FTSE 350 said the impact was less than 1 per cent.

Furthermore, discount rates, one of the most significant assumption tools, varied from 2.7 per cent to 3.1 per cent over the FTSE 350, with 88 per cent of companies using a discount rate within 0.1 per cent of the 2.8 per cent average.

“There is more bunching around the average assumption this year. We expect this is driven firstly by lower demand for alternative approaches because higher yields have reduced liabilities, and secondly by auditors taking a tougher stance following last year’s FRC review,” Russell-Smith added.

Schemes will also have to take into account changes to the IAS19 measure which came into force in January, meaning schemes will have to remeasure their pension expense part way through the year if a major event such as closing to future accrual, a member transfer exercise or a partial buyout occurs.

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