UK - Despite the strong rally in the equities market, continued improvements in life expectancy may have added £10bn or more to FTSE 100 companies' liabilities over the past three years, pensions advisors Aon Consulting said.
Recent government figures showed showed a 10% increase in the life expectancy since its 2001 forecast.
Using the Government's latest life expectancy figures and the FRS17 accounting rules, Aon predicts that for every year of increased life expectancy, pension costs will rise by approximately 3.5 per cent. This could equate to increased liabilities for the FTSE 100 of £10 billion, or £100 million each.
Paul McGlone, a principal at Aon Consulting, said We calculate that if the life expectancy figures which FTSE 100 companies use to calculate their pension provision are underestimated by just one year, this is likely to understate liabilities on balance sheets by £10bn.”
He added further underestimation of the effects of mortality improvements would lead to even bigger shortfalls.
“Our advice to companies is to check - on an ongoing basis - that the assumptions they base their pension provision on are in line with the latest expectations as well as the experience of their scheme,” McGlone said.
According to Aon, the anti-discrimination legislation would significantly impact companies as they would no longer be able to enforce a mandatory retirement age below age 70.
“As individuals come to realise that their company and state pensions will not provide for an adequate retirement, their natural reaction may be to work longer. This new legislation may mean that for the first time, employees actually have the power to demand this longer working life,” Aon added.
McGlone said that for many individuals it was more realistic for the planning of retirement to focus not on a specific retirement age but on working long enough to accumulate the means of obtaining the required level of retirement income.
“Low levels of pension investment in youth and middle age, coupled with three successive years of falling equities means that many people approaching retirement age will be disappointed with their impending level of income. The solution for the majority of the UK population will be to work beyond the common retirement age of 65, he added. The new mortality calculations would also increase pressure to raise annuity rates, leading life insurance companies to come under further scrutiny from rating agencies as their exposure to mortality risk increases.
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