Shareholders in companies with defined-benefit pension schemes face massive risk exposure from increased longevity, according to research from Prudential.
Pru says the exposure is 762bn, far outstripping the longevity risk of 30bn for shareholders in UK-listed insurers Head of mortality risk Ste-phen Richards is concerned that liability calculations for non-insurance companies are less tightly regulated, with little disclosure of longevity assumptions. The problem is exacerbated by the fact that several FTSE 100 companies have pension schemes several times bigger than their market caps. In January, British Airways’ DB scheme liabilities were equivalent to 899 per cent of its market cap. For ICI, the figure is 352 per cent, for BAE Systems, 242 per cent and for BT 224 per cent.
Richards stresses that any miscalculations in these companies’ longevity risk could lead to economic meltdown. At the other end of the scale, Vodafone and Liberty International’s schemes comprise just 1 per cent and 2 per cent of the companies’ respective market caps.
The FRS17 accounting standard, which is meant to ensure realistic reporting of companies’ balance sheets, does not factor in longevity risk. Richards says Institute of Actuary members are pushing companies to disclose this information in their report and accounts, which is a requirement for insurers.
Small and medium-sized companies are also over-exp-osed to longevity risk because schemes with 50 or less members self-insuring need to provide significant capital to provide any guarantees because such a small employee base can often throw up anomalies in actuarial calculations.