We may not live as long as experts predicted – bad news for us, but better news for the insurance industry, according to experts at PwC.
The latest life expectancy analysis from the Continuous Mortality Investigation (CMI) says we aren’t seeing the same rates of improvement in life expectancy was were experienced at the start of the 21st century. And because life expectancy underpins many pension scheme deficit forecasts, if the trend continues, £310bn could be wiped off the UK’s £530bn pension deficit, cutting it to around £220bn.
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, PwC says pension fund assets would still need to grow by an extra 1% a year more for the next 20 years – more than currently assumed in deficit calculations - 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. Raj Mody, PwC’s global head of pensions, said:
Illustrative projections for members aged 40 and 55 today:
Notes to editors
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 is now projected to live to 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.
Skyval is a pensions platform which trustees, sponsors and all advisers can use for their pension scheme, as a single and confidential tool for their scheme-specific funding, investment, analytics and benchmarking requirements. The Skyval suite of modules includes Skyval Dashboard, Skyval Monitor, Skyval Choice, Skyval Optimiser, Skyval Accounting and Skyval Insure. Skyval helps pension schemes reduce costs, manage risks and make better decisions faster. Visit www.skyval.com, follow @SkyvalOnline or connect on LinkedIn.