By David Prosser
Companies with final-salary pension schemes will today be told to use much more up-to-date information about members' life expectancies, or face an investigation of their finances.
The Pensions Regulator, the watchdog that polices final-salary occupational pension funds, will today publish the details of new proposals under which assumptions about life expectancies that it deems unrealistic would trigger an investigation of a scheme's valuation.
The watchdog is concerned that in many cases where it has studied pension schemes with deficits in their funds, the assumptions made by trustees about how long members are likely to live have been lower than the latest data from the Government Actuaries Department.
In future, the regulator intends to treat unrealistic assumptions as a trigger for the investigation of a fund valuation – the process through which the watchdog examines how the scheme is financed and the steps employers and trustees are taking to close deficits.
The move is likely to cause controversy among large employers. The regulator hopes that its focus on mortality assumptions will force schemes to move to using more up-to-date life expectancy data. However, each extra year that schemes assume their members will live for adds up to 4 per cent to the cost of funding their benefits.
James Wintle, a senior consultant at Watson Wyatt, the pension fund adviser, said that in addition to adding to schemes' costs, there was also a danger that the regulator's proposals might give trustees a false sense of security if they simply adopt its views on mortality assumptions.
"The danger in blindly following the regulator's trigger points is that trustees and sponsors could be misled into believing that by funding at this level all mortality risks are covered," he said. "In reality, it is still quite possible that either significant surpluses will emerge or that future strengthening of the assumption will turn out to be necessary at future valuations.
Mr Wintle said that while estimates of scheme members' life expectancies had risen faster than expected in recent years, there was still considerable debate over the accuracy of forecasts, with widespread disagreement between demographers and other experts.
He warned: "The important point for trustees and sponsors of pension schemes is to understand the uncertainty around future levels of mortality and to review sensitivity calculations that illustrate the scenarios considered most plausible by the experts."Reuse content