On the go: PwC is proposing changes to the way defined benefit schemes calculate the impact of projected life expectancy improvements in its liabilities, as these pension funds have more than £130bn tied up in assumptions that have not yet materialised.
According to analysis from the professional services company — which queried 224 DB schemes with assets of £220bn — pension funds are on average assuming life expectancy continues to improve by 1.5 per cent a year.
Considering the example of a female pension scheme member currently aged 45, she is expected to live to 86 according to suppose standard assumptions.
Using an additional 1 per cent a year long-term improvement rate, she would be expected to live to age 88. If improvements turned out to be 1.5 per cent a year instead, she would be expected to live to age 89.
However, if that improvement happens, those extra years of pension payments would not be needed until after 2060, PwC noted.
The company stated that while it is right that pension schemes are run prudently, DB pension “funding is a one-way valve — if schemes end up overfunded it is difficult for sponsoring companies to retrieve surplus assets”.
Due to this, PwC is advocating for a revised regulatory approach that reduces the cash required from viable companies in the short term, even if prudent assumptions are made for the long term.
The analysis found that schemes have average deficit-recovery periods of about seven years, with a gradual trend for that period to be shortening over time.
Considering that long-term life expectancy improvements relate to potential events that may unfold over several decades, an alternative for many viable companies could be a more gradual approach to funding prudent longevity forecasts — for example, doubling the recovery period for this component to an average of 15 years, it added.
If just one-third of the £130bn liabilities were redirected, this could support the creation of 150,000 new jobs for the next decade, helping to boost the UK’s economic recovery after the pandemic, PwC stated.
Emma Morton, PwC pensions actuary, said: “We might hope for substantial improvements in longevity, but that doesn’t necessarily mean that viable businesses should pre-fund their pension schemes today for that future scenario.
“Current practice means that trustees are asking sponsors to fund for these long-term improvements over a relatively short period. But most trustees and sponsors have time to see whether or not these improvements are likely to happen.”
Ms Morton noted that trustees carry out formal funding checks at least every three years, with informal reviews in between, so this matter can be kept under consideration.
“Another solution could be to fund for the potential impact in separate arrangements, so-called reservoir trusts, which support the pension scheme but are also easier to refund back to the sponsor if the funds are ultimately not needed,” she concluded.
