Steep rise in pension liabilities due to longer life expectancy

Pension liabilities have risen in the UK by approximately £30bn in two years due to the increased life expectancy of scheme members.

Analysis from KPMG showed that the assumed life expectancy of the average UK pension scheme member at the end of 2006 was approximately one year higher than at the end of 2005, and two years higher than at the end of 2004. Every extra year that members are assumed to live adds around £15bn to the UK private sector balance sheet, leading to an increase of £30bn in just two years.

KPMG’s findings, based on a database analysis of around 200 companies at 31 December of 2005 and 2006, revealed that the current total UK private sector pension liability is approximately £500bn. FTSE 100 companies have borne the majority of this cost, with an estimated £25bn being added to their balance sheets over 2005 and 2006.

The analysis also stated that, compared to the aggregate FTSE 100 pension deficit at 31 March 2007 of approximately £25bn, had life expectancy remained at previously assumed levels, there may have been no such deficit.

According to the study, companies still offering defined benefit pensions should take into account how uncertainty around life expectancy can be assessed and managed. Alastair McLeish, head of KPMG’s pensions practice, said: "Companies are increasingly looking at new ways to approach defined benefits pensions risks. Some have introduced ways of sharing the risk of longer lifetimes with members, for example, by setting employee contributions or the level of future benefits to change in line with changes to life expectancy. Other employers ar considering hedging their pension liabilities using emerging life expectancy derivative products."