Actuaries' inaccuracies prove a headache for pension providers

Pension scheme trustees have become increasingly frustrated about the inability of their actuarial advisers to offer clear and accurate guidance on members' life expectancies, the National Association of Pension Funds said last night.

Joanne Segars, the chief executive of the NAPF, said: "Schemes do get frustrated with the advice they get from actuaries because trustees are having to work harder to get accurate information."

The warning followed the publication of guidance notes from the Continuous Mortality Investigation, set up by the actuarial profession to provide standard assumptions about life expectancies, on which pension schemes base their funding decisions.

The CMI warned that interim guidance published five years ago, which predicted the speed at which life expectancy in the UK was improving would slow down, had not yet proved accurate. In fact, life expectancies have continued to increase at a much faster rate than anticipated.

The update implies that pension schemes may have been underestimating the life expectancies of their members, a serious headache for final salary occupational funds, which must plan for the cost of providing pensions to members who have retired.

Nick Dumbreck, president of the Institute of Actuaries, said he had written to members warning them to get to grips with current trends on life expectancy.

Richard Giles, a principal at the pensions consultant Mercer, added: "The longevity risk held within pension funds is enormous - in the private sector alone, there are £1,000bn of pension liabilities underwritten by company shareholders."

Ms Segars said pension funds would not immediately be panicked by the revised mortality assumptions, because other factors were currently working in their favour. Strong global investment returns over the past three years have substantially reduced the deficits faced by many pension scheme sponsors.

However, the ongoing uncertainty over life expectancy assumptions adds to the risk factors faced by companies that underwrite final salary schemes.

Mr Giles said the uncertainty would increase the demand for products such as bulk buy-out annuities, where final salary scheme providers pay insurers a fixed sum in order to offload their future pension liabilities.