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Yet the Pensions Regulator has made proposals which could add the same again to companies' costs.

New research by KPMG shows that companies have again strengthened life expectancy assumptions within their financial reporting over 2007, increasing the cost of pensions by around £40 billion over the past three years.

Above average life expectations 

The research shows that the average assumed life expectancy for current pensioners has now risen to 86 - up from 83 in 2004, 84 in 2005 and 85 in 2006. Companies assume that current employees will live even longer - to 87 on average.

Within KPMG's database, the trend for financial services firms to assume above average life expectancies persists with assumptions in this sector around 1 to 1.5 years longer than in other sectors.

Mike Smedley, partner at KPMG in the UK, said that 2007 was a good year to bury bad news on pensions.

He pointed out that whilst performance of pension assets was not spectacular, the liquidity crisis resulting from the credit crunch meant that AA-rated corporate bond yields - which are used to discount liabilities - increased by some 70 basis points.

This led many companies' underlying pension liabilities to fall by more than 5 per cent.

Pensions buy-out market 

“That meant improving life expectancy allowances could be absorbed without significant pain to the balance sheet," Smedley added.

KPMG have also noted that this “credit crunch effect” and increased bond yields had also had a positive effect on the pensions buy-out market - prices fell significantly due to the increased bond yields that insurers can obtain, and fierce competition.

Coupled with companies moving closer to insurers' assumptions for life expectancy, this makes buy-out an increasingly affordable option.

“In the past two years, many more insurance-based providers have entered the market and have taken the opportunity provided by the credit crunch to reduce buy-out prices - in anticipation of being able to buy cheap bonds to back the liabilities,” Smedley said.

He explained that using insurance solutions is now a much more realistic option for many companies looking to de-risk or even completely offload their pension scheme liabilities.

Pensions shortfall

Despite companies taking a much more cautious view, however, this might not be enough to satisfy the Pensions Regulator if its draft February 2008 guidance is adopted.

KPMG's research shows that only 2 percent of companies are using the assumptions proposed in the Pensions Regulator’s draft guidance.

KPMG estimates that UK plc could be facing a further £40 billion pensions shortfall if they were to adopt the Pensions Regulator’s assumptions.

“Taken at face value, the Regulator’s guidance suggests that it believes life expectancy will increase indefinitely. The fact that only 2 per cent of companies agree with this view suggests that the Regulator has taken a step too far,” Smedley noted.

He said that many companies think that the Regulator has overstepped its remit and that it should not be the industry standard-setter on mortality assumptions.

Related articles

• FTSE 100 firms offload pension risk
• CIMA warns on pension risk
• Interest in pension buyouts doubles
• The cost of living longer
• Mortality triggers could be misleading
• Half the FTSE100 changed pension mortality assumptions
• Key role for finance directors in pension reform
• Six in ten firms look to offset longevity risk

Related links

• KPMG
• Full report