Page last updated at 00:37 GMT, Thursday, 22 May 2008 01:37 UK

Firms assume increased longevity

Two men discuss their pensions
Their life expectancy continues to rise

Many UK companies are now assuming their male pensioners will live, on average, one year longer than they assumed in 2006.

The figures were drawn from a survey of 270 company reports carried out by the accountants KPMG.

The assumed life expectancy has steadily risen in recent years to 86.

However KPMG warned this might not satisfy the Pensions Regulator which wants employers and pension schemes to assume that men will live to 89.

The companies whose annual reports were scrutinised assumed that existing male employees would live even longer than the current pensioners, to 87 on average.

But Mike Smedley, a partner at KPMG, said only a small minority of firms were complying yet with the Regulator's draft guidance.

"Taken at face value, the Regulator's guidance suggests that it believes life expectancy will increase indefinitely," he said.

Catching up

According to KPMG, the assumed life expectancy of pensioners in these firms' pension schemes has now risen by one year in each of the past four years.

There is great uncertainty about how this trend will go in the future
Mike Smedley, KPMG

It was 83 in 2004, 84 in 2005 and 85 in 2006.

"It's interesting they are going by one year, every year," said Mr Smedley .

"There is an element of catch-up but there is great uncertainty about how this trend will go in the future," he added.

Despite the fact that each added year of life adds about an extra 3% to the cost of providing a pension, that was easily absorbed by the companies on their balance sheets.

The cost of funding a pension is measured by assuming that all the pension scheme assets are invested in high-grade corporate bonds, which pay a fixed return to investors.

Last year, due to the credit crunch, corporate bond prices fell, thus increasing the yield available to anyone buying those bonds.

This meant that the rise in the expected pension payments was more than offset by a 5% drop in the cost of buying the bonds needed to fund them.

However, bond prices and yields are volatile.

A reversal of recent trends in the corporate bond market would make the cost of funding the increased life expectancy of pension schemes appear much more of a burden than was the case last year.

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