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Actuaries have been too cautious when estimating life expectancy, expert says


After years of underestimating how much longer pensioners are living, new data appears to show that actuaries are now overestimating longevity, a pensions expert has said.

Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the new data could "potentially lead to a reduction in scheme deficits and to cheaper annuities" if actuaries – who have a statutory role in the regulation of pension schemes – took this into account when completing their regular valuations.

"One of the reasons for the large deficits in many defined benefit schemes is that actuaries have had to adjust their calculations to take account of increased longevity," he said. "Actuaries have received some criticism in the past for underestimating how much longer pensioners were living, however it looks like they may now have erred too much on the side of caution. However, it may take some time to persuade actuaries to change track."

Figures published by the Office of National Statistics (ONS) in February showed a 4% improvement in the mortality rate in England and Wales over the previous year, resulting in 20,000 fewer deaths than would otherwise have been expected. At the time, the Actuarial Profession said that this would likely have a knock-on effect on pension scheme funding.

However analysis of the latest census data by Richard Willets, head of longevity at life assurance company Friends Life, indicated that the number of people aged between 85 and 89 was about 2% lower than expected, while those aged over 90 was around 15% lower than expected. This meant that life expectancy beyond 65 - the state pension age - "should be slightly lower", he told the Financial Times.

Defined benefit pension schemes, such as final salary schemes, promise a set level of pension once an employee reaches retirement age no matter what happens to the stock market or the value of the pension investment. In its third annual survey of pension professionals, published in May, risk management company the Pensions Corporation said that companies could have to pay out more than £100 billion over the next three years to make up deficits in their pension schemes as they struggled to cope with increasing life expectancy and poor investment results.

Scheme trustees are required by law to ensure that a pension scheme has "sufficient and appropriate assets to cover its technical provisions". They must obtain a written valuation of assets and technical provisions each year, although full valuations need only be done once every three years if actuarial reports are obtained for the intervening years. The Pensions Regulator made it clear earlier this year that employers which were "substantially underfunding" schemes would be expected to fund schemes in accordance with previously-agreed plans despite the current economic climate, however added that it would give "greater breathing space" to employers which were struggling to do so.

Increasing life expectancy has led the Government to raise the age at which pensioners are entitled to claim the state pension. The retirement age for women, currently 60, will go up to 65 to match that of men in 2018 before it rises to 66 for both sexes in October 2020 and 67 by 2028.

Future increases in the state pension age are to be automatically linked to increases in longevity, according to a speech given by the Chancellor of the Exchequer alongside the 2012 Budget. Details of how the scheme will operate have not yet been published.

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