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Last Updated: Wednesday, 26 September 2007, 15:11 GMT 16:11 UK
Pension plans ignore longer lives
Tony Hobman, chief executive of the Pensions Regulator
Tony Hobman, chief executive of the Pensions Regulator
Pension schemes in deficit may still be underestimating how long their pensioners will live, even when they have put in place a recovery plan.

That is one of the conclusions drawn by the Pensions Regulator from recovery plans submitted by 1,292 schemes for approval up to August 2007.

Where a deficit exists, scheme trustees must tell the Regulator how this deficit will be made good.

It says most do not assume that life expectancy will keep rising as before.

Ten-year plans

The Regulator said employers and trustees were taking seriously their duty to put in place a recovery plan, usually involving extra payments, if a scheme was deemed to be in deficit.

The longevity assumptions we have seen have not yet reflected the recent debate on what might be considered prudent
Tony Hobman, chief executive of the Pensions Regulator

There were very few disputes over this and most plans envisaged eliminating the deficit within 10 years.

But the Regulator said in nearly all cases, those plans it had examined were lagging behind current thinking on the extent to which people would continue to live longer in the future.

"It is clear that the longevity assumptions we have seen have not yet reflected the recent debate on what might be considered prudent," said the Regulator's chief executive Tony Hobman.

"We would expect future plans to take into account recent arguments for strengthening assumptions."

A year ago, the Regulator warned that pension schemes would need to assume that people would continue to live longer.

Uncertainty

The recovery plans in question were applied to valuations of pension schemes that took place in the six months between September 2005 and April 2006.

At the time, there was considerable uncertainty among demographers and actuaries about whether or not the substantial increase in life expectancy seen in the past couple of decades would continue or start to tail off.

More recently, expert opinion has been swinging in favour of assuming that improvements in mortality - especially for those born between 1910 and 1942, the so-called "golden cohort" - will in fact go on.

This has huge implications for the cost of providing pensions, as a one-year increase in average life expectancy is thought to increase the cost of paying that person's pension by 3%.

Hardly any of the recovery plans submitted to the Regulator adopted the view that mortality would continue to improve as before.

Part of the reason for this was that scheme trustees are supposed to take into account the actual experience of their own pensioners, which might be different from the general population.

But the Regulator warned that mortality assumptions must be updated in the future.

"Recent research produced by the CMI (Continuous Mortality Investigation of the Institute of Actuaries) indicates that the rate of mortality improvement is not slowing down as would be expected," it said.

"Although considerable uncertainty remains around the rate of future mortality improvements, we expect trustees and their advisors will consider this latest research when setting the assumptions to be used for future valuations."



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