Shifts in life expectancy could halve size of defined benefit deficits
The value of defined benefit pension deficits will be slashed in half if life expectancy increases continue to slow, according to a PwC analysis.
The consultancy says that DB deficits increased by £30bn to reach £530bn at the end of April.
However, it predicts that if latest life expectancy data showing a slowdown in rates of improvement continued, £310bn could be wiped off that figure.
If funds grew 1 per cent faster than current assumptions for the next 20 years, the deficits could be eradicated without companies contributing more cash.
Figures from the Continuous Mortality Investigation suggest that, for members aged 40 today, schemes would have typically projected a life expectancy of 90 and 91 respectively, but updating historic long-term improvement rates cuts this to 84 and 86.
For members aged 55, both male and female life expediencies are also revised down by four years apiece.
PwC global head of pensions Raj Mody says: “In the first decade of this century, there was a clear trend for improvements in life expectancy. Pension funds have typically been assuming this trend will continue when forecasting deficits. But over the last five years, that trend has changed and there is a growing view that it is not just a ‘blip’.
“Any given pension fund will have to think about how the national data affects their situation specifically – that will depend on the composition of their membership relative to the UK population generally. However, £310bn could be shaved off pension deficits if the latest life expectancy trends are assumed to continue and allowances for previous long-term improvements are removed.
“That then puts a fuller funding situation within reach for many pension funds, without relying on excessive cash contributions to repair deficits in the short term.”