Page last updated at 14:01 GMT, Monday, 18 February 2008

Warning on pensioners' longevity

David Norgrove, chairman of the Pensions Regulator
David Norgrove, chairman of the Pensions Regulator

The Pensions Regulator has told pension scheme trustees that they should use more realistic assumptions about how long their members are likely to live.

The regulator has become concerned that many final-salary pension schemes are underestimating longevity.

The regulator thinks they should assume that 65 year old men will live, on average, until they are 89.

Schemes should also assume that past improvements in life expectancy will continue and not tail off.

David Norgrove, chairman of the Pensions Regulator, said he wanted final-salary schemes and employers to be more prudent.

"There is no point in deluding ourselves that people are going to live less long than that actually might," he said

Reality

Although no one knows exactly how long people will live on average, it is clear that over the past two or three decades there has been a very sharp improvement in longevity.

Life expectancy is going up faster than anyone expects
David Norgrove, Pensions Regulator

Twenty years ago a 65 year old man could look forward to living only 15 years more, while a woman was expected to have an extra 19 years of life.

The most recently published central projections from the Office for National Statistics (ONS) suggest that a man who is 65 this year will live 21 more years until they are 86, while a 65 year old woman will live for another 23 years until they are 88.

But if the higher projections also published by the ONS turn out to be accurate, then by the year 2040 men who are aged 65 will have an extra 29 years to live.

"Life expectancy is going up faster than anyone expects so there's been a constant process of the assumptions catching up with reality, and we want to give that a boost," Mr Norgrove said.

Greater costs

The consultation paper should pave the way for formal guidance to all final-salary pension schemes.

If trustees fail to agree on a set of longevity assumptions with their employers then the regulator will be able to step in and impose them.

"What we are going to do is to challenge people to say why they are not going to assume that life expectancy is going to carry on improving" said Mr Norgrove.

Every extra year of life adds between 3-4% to the cost of funding a final-salary pension scheme.

John Ralfe, an independent pensions consultant, warned that many companies are not even yet recognising the current benchmark assumptions for longevity, let alone more prudent ones.

"For them the change is going to be quite significant, adding possibly 10% to the cost of their liabilities," he said.

"The larger the longevity assumptions the more money that companies have to put into their schemes," he added.

The big actuarial firm Watson Wyatt pointed out that mortality and longevity varies between different parts of the population.

"Mortality really is scheme specific and too prescriptive a trigger will not fit that very comfortably," said James Wintle of Watson Wyatt.




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