Pensions deficit improves as life expectancy growth stalls: PwC
New analysis of life expectancy growth trends suggests £310bn could be erased from the UK’s pension deficit by life expectancy changes. It comes as data shows the pensions shortfall rising.
Changing pensions deficits calculations for life expectancy trends
Commenting on the data, 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 years, that trend has changed and there is a growing view that it is not just a blip.“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.”Related reading:
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Defined benefit pensions scheme deficits rise again
PwC’s drew on this analysis as it published its latest pensions-planning Skyval Index, which provides an aggregate health check of the UK’s 5,800 or so defined benefit pension funds. This showed 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 suggests if the recent life expectancy trend continues, £310bn could be wiped off the aggregate £530bn pension deficit, leaving £220bn.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 five years.Scope to close deficit for good?
Pension fund assets would also need to grow by an extra one per cent 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.“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,” continued Mr Mody.“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.”Follow the links for more HR news and features.
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