A prominent financial services firm sent out a warning last week to Scottish pension schemes saying they could be inflating deficits due to the use of UK-wide life expectancy figures, which are higher than the Scottish average. But schemes and advisers have questioned whether these accusations are a fair reflection of actuarial work in Scotland

On 28 February, Pension Insurance Corporation issued a statement warning that Scottish schemes may be overestimating their liabilities by using UK longevity assumptions. By using the same figures as for example a pension scheme in South East England, a pension scheme run by a firm based in Glasgow, say, may be adding an unnecessary extra couple of years to average expected life spans, increasing them from 75.4 years to 77.9 years.

Jay Shah, co-head of business origination at Pension Insurance Corporation, said that the Scottish region with the highest life expectancy falls below the UK average and that this has important implications for Scottish pension schemes.

"At a time when pension deficit burdens are weighing heavily on many Scottish companies, it is more vital than ever that accurate figures are used to inform critical decisions regarding the management of these schemes," he said. 

The Office for National Statistics (ONS) shows that life expectancy in Scotland is considerably lower than in the rest of the UK, with differences of up to no less than ten years. It is these regional differences that the corporation is urging pension schemes to adapt, giving a more accurate assessment of their deficits.

"Using longevity averages as a benchmark, without considering regional differentials, could lead to an overestimation of liabilities and consequently an inflated deficit. Whilst the biggest schemes have the resources to assess the differentials, the smaller schemes are unlikely to," added Shah.

In research conducted by Pension Funds Insider, a variety of responses came to light. Some larger Scottish pension schemes said they could not say if the comments were fair and relevant to their calculations due to the fact that they had a very mixed set of members, residing all over the U.K.

An example would be the Scottish Widows own pension scheme which houses a range of people in different locations as they are part of the Lloyds Banking Group.

Others, such as the Scottish Public Pensions Agency (SPPA), which is responsible for schemes for the NHS, fire fighters and the police department, said that the public element of the schemes the agency manages prevented them from using UK averages.

Steward Cooper, a communications officer for SPPA, says that the SPPA can only speak for the five public sector pension schemes for which Scottish Ministers have some devolved responsibilities, "but for each of those schemes, regular valuations are conducted using specific Scottish data and specific Scottish assumptions about life expectancy."

Whatever faults that may lie under the surface, there is a general consensus that improvements to longevity measurement are always being made.

Steve Hood, a longevity consultant at Club Vita, says that taking the National Statistics data and trying to apply a blanket average difference in life expectancy of some two and a half years between Scotland and the rest of the UK may perpetuate the myth that all Scots lead unhealthy lifestyles, but does nothing to help sponsoring employers who may worry that their DB schemes are costing them even more than they should.

"You have to break down the statistics by regions," says Hood. "Someone in an urban region of Glasgow will have a very different life expectancy at age 75 then someone who lives in Perth."

"Then there are the individuals in a scheme," he adds. "Some of those may work on the factory floor and live in a deprived area of the country, whereas the Managing Director will have a house out in the countryside and have very different life prospects."

As a result, he says, actuaries generally now put all sorts of adjustments into their assumptions, in order to accurately reflect the liabilities of a scheme.

azeevalkink@wilmington.co.uk

First published 11.03.2011