New figures released today from PwC’s Skyval Index show the deficit of defined benefit (DB) pension funds stood at £530bn at the end of April 2017, a £30bn increase since last month.
However, latest life expectancy analysis - from the Continuous Mortality Investigation (CMI) - shows that we are no longer seeing the same rates of improvement in life expectancy experienced at the start of the 21st century, and which underpin many pension scheme deficit forecasts. If the more recent trend continues, £310bn could be wiped off the aggregate £530bn pension deficit, leaving £220bn.
Furthermore, pension fund assets would need to grow by an extra 1% a year more than currently assumed in deficit calculations, for the next 20 years, to cover the remaining £220bn deficit without needing company cash contributions.
PwC’s Skyval Index, based on the Skyval platform used by pension funds, provides an aggregate health check of the UK’s c.5,800 DB pension funds. The current Skyval Index figures are:
Raj Mody, PwC’s global head of pensions, said:
“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 year, 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. For example, if assets grew by an extra 1% a year than otherwise assumed when working out deficits in the first place, that on average would cover pension liabilities without the need for company cash contributions. Clearly the right strategy for each pension fund will depend on their specific circumstances.
“If pension schemes were previously assuming that a 40-year old man lives to 90, but that could end up being 84, you would look at current deficits in a different light. Companies and pension trustees should rethink their approach for how best to cover some very uncertain scenarios which aren’t going to become clearer for a few decades.”
Illustrative projections for members aged 40 and 55 today:
Notes to editors
Raj Mody is available for interview - please contact Katherine Howbrook on 020 7212 2711/07595 609 737 or email@example.com
Notes on deficit measures:
Funding measure: the target used by pension fund trustees to determine company cash contributions, calculated on a bespoke basis for each pension fund, agreed between the trustees and sponsor.
The “funding measure adjusted for reduced life expectancy projections” adjusts for the following issue: pension fund trustees typically make an allowance for life expectancy to continue to improve a very long time into the future. However, these pension payments are not yet a commitment - they are just a prudent expectation of what might unfold over the next few decades.
Example: If a man aged 55 today is projected to live to 84, but that ends up looking more like 88 thanks to medical or health improvements, those extra few years’ pension aren’t going to be due until around 30 years from now. Similarly, a woman aged 40 now may be expected to live to 86, but could eventually live to 91 depending on rates of future improvement in longevity. Those extra years of pension, in over 45 years’ time in this example, may not need to be fully paid up now.
This adjusted funding measure recasts the deficit by removing the additional allowance for life expectancy improvements, which haven’t yet happened, and updates the projection for trends seen in national population data over the last 5 years.
Figures provided have been estimated by PwC and Skyval based on publicly available data of UK defined benefit pension funds, including from the Pensions Protection Fund’s dataset.
Other pension deficit measures exist but are generally not meaningful for tracking the health of UK pension funds. For example:
Accounting: the target value of liabilities shown in company accounts, based on formal accounting standards (such as IAS19) which typically assume asset returns in line with AA-rated corporate bond yields. Pension decision-makers should not rely on the accounting measure to inform their management decisions. Accounting numbers are not designed to be tailored to individual pension fund circumstances. Some commentators publish IAS19 tracking figures but they are not in isolation a good basis for understanding pension funding status, nor deciding the best future strategy for any given pension fund's assets and liabilities.
Buy-out: the value an insurer would typically place on the fund's liabilities, which depends on prevailing market terms for these kinds of transactions. It is a hypothetical scenario for all pension funds to buy out their total liabilities in one go, as there is not enough capital market capacity to support this. Some commentators cite the theoretical deficit on such a buy-out basis as in the region of £1trn, but this is not a cost which could or would ever be incurred in this way in practice.
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