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£25bn could be wiped off DB debt

26 January 2017

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Trustees of the UK's defined benefit (DB) pension schemes could reduce the collective UK deficit by £25bn by more accurately predicting how long people will live.

Schemes are currently taking a more cautious approach to longevity that could be distorting their strategy, according to longevity service provider Club Vita.

Douglas Anderson, founder of Club Vita, said: "With rock-bottom interest rates causing pension deficits to swell, trustees and sponsors of defined benefit pension schemes need to avoid unnecessary margins in assumptions.

"Companies with schemes facing record funding deficits, along with scheme trustees, should look at whether they're taking an unnecessarily prudent approach."

Analysis from Club Vita, which pools the longevity data of more than 200 DB schemes and insurers, shows that trustees are still taking unnecessary margins in setting their longevity assumptions.

Anderson said each time the company takes on a new scheme, on average there's an over-valuation of liabilities of around 1%, with several schemes having far larger reductions to their deficits.

"The 1% average reduction is equivalent to continuing to pay everyone's pension for 4 months after they have passed away," he said.

"If the same pattern was seen across all the UK's defined benefit pension schemes, then deficits could fall by £25bn."

The company says bigger schemes are not better at assumption scheme than smaller schemes, with several £1bn schemes overestimating liabilities by substantial amounts.

"The ultimate cost of a pension scheme will be determined by how long its members actually live, but assumptions made today really do matter for such long duration commitments," said Anderson.

"The confidence that trustees gain from more insightful longevity assumptions does change behaviours, affecting members' benefits, their security and businesses' ability to invest."

Longevity management is increasingly moving higher up schemes' agendas, with longevity risk now a bigger risk than ever before.

First published 26.01.2017

Lindsay.sharman@wilmingtonplc.com