Naz Peralta, Pensions Director at KPMG, comments on ‘Lost decade’ of life expectancy improvements as assumptions fall for the fourth year in a row.
Life expectancy assumptions have fallen for the fourth year running, reflecting a decrease in the expected rates of future improvements in mortality, according to KPMG’s latest Pensions Accounting Survey.
KPMG’s Pensions Accounting Survey looks at trends in best-estimate assumptions based on 212 clients with UK Defined Benefit (DB) pension schemes reporting under IFRS, UK GAAP or US GAAP at 31 December 2018.
Median assumed life expectancies for current pensioners have reduced by 0.2 years (to 86.9 measured from age 65) whilst life expectancies for future pensioners have reduced by 0.1 years (to 88.4 measured from age 45) compared to last year’s survey. This has led to an improvement in company balance sheets.
The trend of falling assumed life expectancies is expected to continue following the recent publication of the Continuous Mortality Investigation (CMI) 2018 model. The latest model introduces a new parameter which allows companies to reflect differences between particular groups of the population (such as pension scheme members), and the general population data on which the model is calibrated.
Naz Peralta, Pensions Director at KPMG said: “Following the publication of CMI 2018, by the end of 2019 assumed life expectancies will be back to levels last seen in 2009. This ‘lost decade of life expectancy’ is largely due to the slowing rate of future mortality improvements as projected by the Continuous Mortality Investigation Bureau (CMIB) over the past four years.
“The initial addition parameter is the second new parameter added in recent years, the first being the smoothing parameter introduced with CMI 2016. Although these in theory allow companies to tailor their assumptions better, in practice it is likely to cause some confusion due to the complexity and subjectivity involved. We expect many companies will use the default assumptions for these new parameters until they are understood better.”
Historic industry estimates of the cost of equalising benefits for the effect of unequal GMPs ranged from 1% to 3% of total liabilities. However KPMG’s report shows that around 70% of companies have reported an impact of 1% or less as at December 2018.
Naz Peralta added: “The data shows that historic industry estimates of the cost of equalising GMPs were overstated. Unfortunately for some schemes the administration and cost of compliance will be almost as high as the cost of increasing benefits themselves.”
Notes to Editors:
KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 16,300 partners and staff. The UK firm recorded a revenue of £2.338 billion in the year ended 30 September 2018. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 154 countries and has 200,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.