How long will we all live? If only we knew the answer to that question. But pension funds must make an educated guess in order to calculate and plan for their projected liabilities.
Researchers Mercer have confirmed that FTSE 100 companies have added 7 months to the life expectancy projections of future retirees, while current retirees are estimated to live a further 5 months longer than had previously been estimated.
Women have statistically been far more likely to outlive their male counterparts, but the difference between their projected lifespan and men’s is getting smaller – men are expected to live to 87, and women to 89.
The changes can be put down to medical advances, and healthier lifestyles. If you are 45 now, your total lifespan is predicted to be two years longer than someone who is 65 now.
So how does this affect pension liabilities? The schemes who are affected most are defined benefit arrangements. In these schemes members are promised a certain level of income. Sometimes such schemes are drawn on a final salary basis, where the income that will be paid is a proportion of the member’s last wage with that employer.
As employers have found to their cost over the past few years, poor stock market performance, miscalculation of how much needs to be contributed and increasing longevity mean that there is less available in the pot to meet those obligations.
FTSE100 companies are estimated to have plugged £17 billion into their final salary schemes last year, but announcements such as this latest about longevity merely open up greater holes.
For employees and self employed people with defined contribution arrangements the news is also bad. It means that their pension pot must be spread over a longer time period, which means that their annuity rates will go down.
At least people will be able to work for longer now that the government is scrapping the default retirement age. The question is, will be working into our nineties?
