Consultation on pension schemes longevity estimates

Release date: 20/02/2008

Company final salary pension schemes may soon have to use much more realistic assumptions about how long their members are likely to live.

The Pensions Regulator has published a consultation document outlining plans to make schemes increase their longevity estimates. The effect would be a big increase in the cost of funding many schemes, potentially pushing some into deficit.

The regulator has been worried for some time about schemes underestimating how long their members will live. The scale of the problem has become clear because the regulator scrutinises the estimates of life expectancy being used when schemes which are in deficit file a recovery plan. It believes that the mortality assumptions being used are often weak.

Now, if it sees out of date assumptions about future improvements in longevity, it proposes to use this as a trigger for an even closer look at the scheme's recovery plan. This threat, it hopes, will prod scheme actuaries, trustees and employers into using more prudent estimates.

The knock on effect, however, is that this could force a much higher level of contributions, and in some cases might provoke employers into closing their schemes on the grounds that the costs have become uncontrollably high.