The longevity assumptions used for the valuation of pension benefits can have a material impact on a company’s balance sheet. The actuarial profession’s most recent research on UK longevity trends has been released to an unusually high level of fanfare. The findings have even caught the attention of the political world, generating prominent headlines ahead of the June general election. The latest data highlights that, although life expectancy is expected to continue increasing in the future, the overall pace of improvements in recent years has been lower than anticipated.

Longevity and pension schemes

For defined benefit (DB) pension schemes, longevity assumptions are a key part of calculating the expected cost of benefits. For many years, the general trend in longevity has been one of sustained improvements throughout the population. Indeed, this has been one of the contributing factors in the increasing cost of DB pension provision. However, the latest evidence suggests the level of improvements in this decade have not kept pace with those in recent decades.

If there is evidence that longevity improvements for a scheme’s membership might be revised downwards, it means members are expected to die sooner than previously assumed. The actuarial profession’s 2016 update shows the estimated life expectancy for a male aged 65 has fallen by over 2% compared with the equivalent estimate from 2013. For company sponsors, the upshot is the expected cost of benefits also falls. This can affect a number of areas.