August 14, 2007 / 11:02 AM / 12 years ago

Blue chips underestimate cost of rise in longevity

LONDON (Citywire) - FTSE 100 pension schemes risk throwing away gains made in recent equity markets.

Consultancy firm Lane Clark & Peacock has warned that this is due to underestimating future increases in life expectancy and remaining heavily invested in equities.

In July 2007 UK pension schemes of FTSE 100 companies had a combined net surplus of 12 billion pounds, compared with a 36 billion pound deficit in 2006, on the back of strong equity markets, rising bond yields and increased contribution levels.

But the consultancy said that the surplus may be short-lived and would likely disappear once companies started using the latest mortality projections.

It added that an 8 percent downturn in the FTSE 100 had already halved the surplus to 6 billion pounds by the end of July.

More than a quarter of FTSE 100 pension schemes updated their life expectancy assumptions in 2006, adding an average 1.5 years to the estimated life expectancy of a pensioner aged 60 in the UK, according to the firm.

Research has shown that people born between 1925 and 1945 were living far longer than expected and actuaries have begun using a “medium cohort” adjustment, which reflects these improvements in mortality rates.

But the consultancy said that even the updated allowances for future life expectancy may not be enough. It added that each extra year of life expectancy adds around 12 billion pounds to pension liabilities.

c Citywire Financial Publishers Ltd 2007.

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