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The firm analysed the pension disclosures in yet-to-be published annual reports and accounts.

Watson Wyatt estimates that the impact of this will have added just over £6bn to FTSE100 pension scheme liabilities.

The company, which advises over 50 of the 100 largest corporate pension schemes in the UK, analysed the provisional disclosures of 21 of the 55 FTSE100 companies with 2007 calendar year-ends.

It found that ten of these had changed their mortality assumptions in 2007 to allow for increases in longevity.

Increased provision of £6bn a year 

The pension schemes upped their predictions of how long their current pensioners are likely to live by an average 16 months.

Even greater increases are expected for members as they retire in 15 years' time, they are expected to live on average 21 months longer.

The cost of this change on companies' defined benefit pension liabilities ranged from 2.5 per cent to 6 per cent.

"If our analysis holds true across the whole FTSE100 - and we have no reason to suppose that it would not - then the increased provision made across the UK's largest companies through these changed mortality assumptions would have cost just over £6bn last year," said Nicola van Dyk, a senior consultant at Watson Wyatt.

She added that this was an injection of realism at a time when many companies felt able to afford it.

Reducing uncertainty 

Van Dyk pointed out that they shouldered the additional cost of building in changed mortality assumptions in a year when asset returns were generally good and bond yields - which have a major impact on liability calculations - were at a high level.

Reducing uncertainty is high on the agenda for companies and their advisers trying to manage the financial risks inherent in their defined benefit pension schemes, according to Watson Wyatt.

“Longevity risk is a significant one; so is investment risk, as the impact on pension scheme assets through recent market volatility has shown," Van Dyk said.

Risk-free rate of return 

Recent proposals by the UK Accounting Standards Board (ASB) in its discussion paper The Financial Reporting of Pensions will, if taken up by the IASB, increase reported liabilities further.

The ASB is suggesting that a risk-free rate of return, such as government gilts or a swap rate, should be used instead of a corporate bond yield.

While it has been suggested that these ASB proposals could add around £100bn to reported liabilities, Van Dyk calls it speculation as to whether they will be implemented and when.

“The longevity changes are, by contrast, concrete and in the here and now, and reflect an expectation of increased real cost of benefits due to members living longer, rather than a change in the approach to measurement," she concluded.

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Related links

• Watson Wyatt
• Accounting Standards Board - The Financial Reporting of Pensions