Companies could shave £230bn off pension deficits by refining approach to life expectancy projections, according to PwC’s Skyval Index
Published at 00:01 AM on 01 February 2017
Trustees and companies are pre-funding long-term potential future life expectancy improvements - these payments could be made more gradually
Companies could save £30bn a year with alternative approaches
Trustees and companies should get information on life expectancy assumptions in plain English
New figures released today from PwC’s Skyval Index show the deficit of defined benefit (DB) pension funds stood at £470bn at the end of January 2017. However, £230bn of this relates to potential life expectancy improvements a long way into the future, and need not be pre-funded over the next decade. Alternative approaches could save pension sponsors up to £30bn a year.
PwC’s Skyval Index, based on the Skyval platform used by pension funds, provides an aggregate health check of the UK’s c.5,800 DB pension funds. The current Skyval Index figures are:
Raj Mody, PwC’s global head of pensions, said:
"We have previously raised the question of whether pension deficits are being measured appropriately and therefore whether financing and risk management strategies are appropriate.
“One particular challenge for pension fund trustees is forecasting future life expectancy for their members. This is notoriously difficult to predict. Because of that, and the requirement for trustees to be prudent when coming up with a target for funding purposes, they typically make an allowance for life expectancy to continue to improve a very long time into the future. However, these pension payments are not yet a commitment - they are just a prudent expectation of what might unfold over the next few decades. Asking companies to stump up the cash over a short-term period, in case of that eventuality, seems over-prudent."
According to PwC's Skyval Index, the additional reserve built into UK pension funding targets could be £230bn in total, out of a current aggregate deficit of £470bn. This is costing companies £30bn a year in pension deficit contributions, which may turn out not to have been necessary, or at least not necessary to pay right now at the expense of other uses for that cash.
Raj Mody added:
"A better and more transparent method would be for trustees and companies to repair a more realistic assessment of the deficit over a short-term period, but then keep life expectancy improvements and other such potential developments under review. They can react accordingly over time depending on emerging and continuing trends.
“It's possible that longevity could continue to improve at recent rates, but that is just one scenario. Even if it did, the new pension commitments arising from that wouldn't be payable until several decades from now.
“If a man aged 40 today is projected to live to 85, but that ends up looking more like 90 thanks to medical or health improvements, that extra commitment isn't going to be due until 45 years from now. Similarly, a woman aged 40 now may be expected to live to 87, but could eventually live to 91. Those extra years of pension in 50 years time, in this example, may not need to be pre-funded now. For many pension funds, there could be a more considered and affordable approach to dealing with this."
PwC emphasises the importance of transparent projections for pension fund assumptions.
Raj Mody concluded:
"The science of life expectancy projections is full of arcane and technical language, and therefore it may not always be obvious to decision-makers what assumptions they are really making. Trustees and companies should ask for information on these assumptions in plain English. They need to know how long fund members of various different ages are assumed to live to, and how this compares to current experience both for the fund in question and in the population generally. This may help as a sense-check on the realism or otherwise of the assumptions, instead of just going with industry average approaches."
Notes to editors
Raj Mody is available for interview - please contact Katherine Howbrook on 020 7212 2711/07595 609 737 or [email protected]
Notes on deficit measures:
Funding: the target used by pension fund trustees to determine company cash contributions, calculated on a bespoke basis for each pension fund, agreed between the trustees and sponsor.
Accounting: the target value of liabilities shown in company accounts, based on formal accounting standards which assume asset returns in line with AA-rated corporate bond yields. Pension decision-makers should not rely on the accounting measure to inform their management decisions. Accounting numbers not designed to be tailored to individual pension fund circumstances. They are not in isolation a good basis for deciding the best future strategy for a pension fund's assets and liabilities.
Buy-out: the value an insurer would typically place on the fund's liabilities, which depends on prevailing market terms for these kinds of transactions. It is a hypothetical scenario for all pension funds to buy out their total liabilities in one go as there is not enough capital market capacity to support this. The theoretical deficit on such a buy-out basis would be in excess of £1trn.
Figures provided have been estimated by PwC and Skyval based on publicly available data of UK defined benefit pension funds, including from the Pensions Protection Fund’s dataset.
Tables: Illustrative projections for members aged 40 and 55 today
Skyval is a pensions platform which trustees, sponsors and all advisers can use for their pension scheme, as a single and confidential tool for their scheme-specific funding, investment, analytics and benchmarking requirements.
The Skyval suite of modules includes Skyval Dashboard, Skyval Monitor, Skyval Choice, Skyval Optimiser, Skyval Accounting and Skyval Insure. Skyval helps pension schemes reduce costs, manage risks and make better decisions faster. Visit www.skyval.com, follow @SkyvalOnline or connect on LinkedIn
At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 223,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.
PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.
© 2017 PwC. All rights reserved
At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.
PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. © 2016 PwC. All rights reserved