Underestimate life expectancy at your peril, warns Pensions Regulator

Underestimating life expectancy among their members could leave pension schemes with tens of millions of pounds of unforeseen liabilities, the Pensions Regulator warned today (Monday).

In a speech to the UK Pensions and Investment Summit in Brighton, the regulator's chairman, David Norgrove, said that scheme trustees and their advisers should take another look at the assumptions they have made about life expectancy to ensure that they remain suitable.

He said: "While individual schemes may have made different assumptions which may be appropriate and prudent, the indications are that some schemes are probably underestimating life expectancy.

"The effects of changing life expectancy are so substantial that they are worth revisiting. Each year of extra life adds about three to four per cent to pension scheme liabilities so, with £800 billion of liabilities across all UK pension schemes, getting it wrong could mean some nasty surprises in the future.

"That is why it is essential that trustees and advisers address this increasingly important issue sooner rather than later."

• Recent analysis by Lane Clark and Peacock (Accounting for Pensions UK and Europe, Annual Survey 2006) looked at longevity assumptions by the 33 FTSE100 companies that reported them in their accounts. Figures were analysed in terms of the life expectancy of a man retiring at the age of 60. The average assumption was for him to live to about 85, with three companies at 82 or under. Only two companies were at 87 or over (which is consistent with the PA92 tables with medium cohort projection).
• Professor Angus MacDonald, who chairs the CMI's Mortality Committee responsible for projections, stated in a recent article in The Actuary that 'recent trends . suggest that the medium cohort projection basis may now be understating future improvements (in mortality).' In other words, the average company assumption is two years below a projection which may itself be understated.
• The actuarial profession has adopted new mortality tables (the '00 series') with effect from 1 September 2006. These include tables based on the mortality experienced by life office pensioners, and are commonly used by occupational pension schemes. They do not incorporate any projections. The CMI is making projection software available for use by actuaries. Fuller details can be found in the Actuarial Profession's press release of 1 August 2006.
• The Pensions Regulator is the UK regulator for work-based pensions. Our statutory objectives are to protect the benefits of members of work-based pensions; to reduce the risks of situations arising which may lead to calls on the Pension Protection Fund; and to promote and improve the understanding of the good administration of work-based pension schemes.

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