DB sponsors update mortality assumptions more frequently
Sponsoring employers are increasingly updating mortality assumptions at a more frequent rate to keep on top of changes in pension liabilities, according to Mercer.
The adjustments are driven by years of increasing life expectancies, which have in turn led to significant increases in liabilities at triennial valuations.
Now, companies are adopting the latest longevity estimates to ensure they are not hit with a big bill every three years.
Although life expectancy improvements have recently slowed, with the Continuous Mortality Investigation (CMI) reducing its improvement predictions, most expect longevity to continue to improve and push liabilities higher.
Mercer's study of 94 UK defined benefit (DB) schemes revealed that just over one in ten companies have adopted mortality improvements of 1.75% or higher in their 2016 year-end accounts, up from 4% in 2015. Three in five firms assumed a 1.25% per annum improvement in mortality in their corporate accounts, while 28% used a prediction of 1.5%.
However, just over a quarter (27%) used the same assumption in their corporate account as they agreed with trustees in funding arrangements, and 58% stripped out some or all prudence.
The consultancy's innovation, policy and research team principal Glyn Bradley said the shift in attitude demonstrates employers' concerns.
"In the last few years, mortality improvements have slowed down, leading to lower life expectancy assumptions," he said. "We are seeing a growing concern among employers about longevity increases of their pension scheme members.
"They are adopting the latest projection models whereas, in the past, they might only have looked at their model once every three years, when they negotiated funding requirements with their scheme trustees."
The firm added the most recent changes in longevity assumptions had cut the aggregate DB deficit reported in accounts for FTSE 350 companies by £2.5bn, under the IAS 19 measure.
"Employers and trustees should continue to pay attention to improvements in mortality and use the latest data to ensure short-term improvements are not over-stated," added Bradley.
It comes as PwC's latest Skyval index showed lower life expectancy projections could wipe £310bn off the total UK pension deficit, which is based on the funding measure used by trustees to determine company cash contributions.
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