EUROPE - Vast differences in how European countries measure life expectancy is wreaking havoc for companies involved in international merger as they attempt to determine pension liabilities, a Cass Business School survey has found.
UBS recently calculated the FTSE 100 companies had a combined pension deficit of more then £40bn, but had this pension liability been calculated using German mortality tables, the deficit would become a £3bn surplus – a difference of £43bn.
Using Danish mortality assumptions the surplus increased to £30bn, while using French mortality assumptions the £40bn deficit became a £63bn deficit, the study revealed.
Many UK companies have consequently taken on huge pension black holes they were not aware of at the time of the merger, said Richard Verrall (pictured), research leader and head of the Faculty of Actuarial Science and Statistics at Cass.
“Many European companies are using inappropriate life expectancy measures which are driving down pension liabilities and artificially inflating share prices,” he said. “This means that a UK company wanting to buy a German company, for example, may assume its pensions liability to be quite acceptable and later get a nasty surprise which could seriously impact future business activity.”
Verrall described the German figures as particularly startling because they had one of the highest levels of company pension schemes of any European country. German companies had taken a “cross your fingers and hope” approach to how long their employees would live, he said.
According to the research, one of the main causes of the variation in mortality assumptions is due to some countries incorporating an allowance for expected future improvements in mortality, while others use tables that relate to mortality observed over a period in the past, without allowing for the continuing rise of life expectancy.
Interestingly, the research found the French approach is to assume that men and women will live for the same period of time. All other countries assume that women will live longer then men. The French use this difference as a ‘buffer’ to account for future advances in overall life expectancy.
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