Last year saw the biggest ever year-on-year fall in expected lifespans for newly retired pensioners — and this is a major contributory factor in DB surpluses, according to a new report.
WTW’s analysis of annual reports from companies in the FTSE 350 found that 65-year olds were expected to live for five months less than when compared to 2022 disclosures.
If schemes used the same mortality assumptions that were used in 2014, WTW calculates that disclosed liabilities would be around 7 per cent higher. WTW points out that aggregate funding levels stand at about 109 per cent, so this change is responsible for the lion’s share of these pension surpluses.
The report also highlights the monumental switch from DB to DC provision. For the first time, companies sponsoring defined benefit (DB) plans paid more into DC plans that into their DB arrangements.
The report also show that for the first time in two decades, the proportion of schemes closed to future accrual (72 per cent) did not increase. However, this follows a rapid rise over the previous 10 years. At the end of 2012, only 26 per cent of these companies had closed their schemes to existing members.
In total 61 per cent of FTSE350 companies with DB schemes disclosed an accounting surplus.
Looking in more details at life expectancy figures WTW found that male scheme members aged 65 were on average assumed to die aged 86.7 years, down from 87.1 in 2022.
Women were expected to live to 88.5 on average, down from 88.9. These numbers have been declining since 2014.
WTW estimates that if companies still used the assumptions about mortality rates in 2023 and beyond which underpinned their 2014 disclosures, men aged 65 in 2023 would be expected to live an extra 2.2 years on average and women an extra 1.9 years.
This would increase the present value of pension liabilities by around 7per cent. Aggregate assets at the end of 2023 were 9 per cent higher than liabilities.
WTW head of UK corporate pensions consulting Bina Mistry says: “The change between 2022 and 2023 may partly reflect companies initially waiting to revise down their assumptions and then doing so once they had more data.
“Mortality experience in 2024 has so far been similar to 2014. Because improvements anticipated a decade ago did not materialise, companies are projecting forward from a lower starting point and taking a gloomier view about what will happen next.
“A recent update to the Continuous Mortality Investigation’s projections model, which employers use to set life expectancy assumptions, should lead to a further small fall in life expectancy in December 2024 accounts. However, this is very sensitive to beliefs about how much weight to put on experience in the couple of years after the pandemic. Companies looking the move pension liabilities off their balance sheets may find that insurer pricing anticipates longer lifespans.”
When it comes to DB versus DC contributions WTW found that FTSE 350 companies in the analysis paid a total of £6.6bn to UK DC plans in 2023, compared with £5.1bn to their DB plans. This is the first time that DC spend has exceeded DB spend amongst DB sponsors.
Mistry adds: “Some companies have been able to switch off deficit contributions, and 2023 did not see the big one-off cash injections reported in some earlier years. Meanwhile, more employees are in DC plans and higher interest rates have pushed the cost of funding ongoing DB accrual right down: this cost fell by almost half between 2021 and 2023.
“Cheaper accrual also helps explain why no employers in this analysis closed their DB schemes to existing members in 2023 – the first closure-free year in two decades.
“In some cases, using a surplus to pay for DB accrual will have been the only way for the sponsor to benefit from it immediately. Proposals to make it easier for employers and trustees to share surpluses could change that, depending on how they get taken forward after the election – but employers persuaded to run their schemes on for longer would have another reason to keep accrual going.
“As DC increasingly becomes ‘where the money goes’, we need more attention on how to deliver the best balance of risk and return, and on how to support members seeking to make a pot of ever-changing size last over a retirement of uncertain length.”
