Continued improvements in life expectancy may have added as much as £10bn to FTSE100 companies' pension fund liabilities over the past three years, according to a leading pension advisors Aon Consulting.
Recently issued figures from the Government Actuaries Department show a ten per cent increase in the life expectancy of a man aged 65 since its 2001 forecast adding another two years onto the average male life expectancy over the next 45 years.
Using the Governments 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
"Advances in science and medicine have had a very positive affect on the number of people surviving into old age and companies now need to ensure that they factor in ongoing longevity changes into their company pension provisions.
"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. 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."
Increasing longevity also underlines the need for workers to think about working past the current retirement age of 65 years. While workers have historically been restricted by employers from working past 65, anti-age discrimination legislation will mean that companies will no longer be able to enforce a mandatory retirement age below age 70. This could impact significantly on companies. 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.
McGlone continues,
"For many individuals it is 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."
According to Aon, the new mortality calculations also raise some interesting challenges for insurers. Under mounting pressure to raise annuity rates, leading life insurance companies may come under further scrutiny from rating agencies as their exposure to mortality risk increases.
About Aon
Aon is the UK's largest insurance broker and provider of risk management services, a major force in reinsurance and number four in the UK human capital consulting market. With more than 10,000 staff spread across 90 UK offices, Aon combines an in-depth knowledge of the UK market with an unmatched global reach and perspective. Aon's structure cuts across boundaries and unites specialists from around the world in global business units. Around the world, Aon posted 2002 revenues of $8.8 billion dollars, and has more than 55,000 employees in 600 offices across 125 countries, servicing clients' requirements at a global level whilst responding to clients’ specialist needs in individual markets.
Aon Consulting Limited is authorised and regulated by the Financial Services Authority.
For further inforamtion please contact:
Nessa Kearney
(Aon Corporate Affairs)
Tel: 020 7882 0067
nessa.kearney@aon.co.uk
Bridget Agnew/Amy Kitson
(Financial Dynamics)
Tel: 020 7269 7219/7161
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