Trustees over-estimating how long pension scheme members will live has added £25bn to defined benefit (DB) fund deficits, a consultancy claims.
Longevity services provider Club Vita came to this conclusion after examining the longevity data of more than 200 DB schemes and insurers.
The Pension Protection Fund (PPF) believes that the shortfall for schemes eligible for its safety net was £223.9bn at the end of December. PwC’s research put the figure at £560bn.
Club Vita founder Douglas Anderson said that on average a scheme over-values its liabilities by around 1%. This equates to a scheme continuing to pay everyone’s pension for four months after they have died.
Anderson also claimed that larger funds are not necessarily more accurate at predicting the longevity of its members. “You might have expected that bigger schemes would be better at assumption-setting than smaller schemes but that’s not so, with several £1bn-plus schemes overestimating liability by substantial amounts.”
For Anderson there is more than one reason behind this miscalculation. First, using final salary and where a member lives to predict how long they will live. “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He also said that the CMI data typically used by schemes to measure death rates is out of date, and managers tend to “err on the side of caution” when adjusting those figures.
“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 business’ ability to invest.”
